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INTRODUCTION 



TO THE 



Study of Economics 



BY 

CHARLES JESSE BULLOCK, Ph.D. 

PROFESSOR OF ECONOMICS IN HARVARD UNIVERSITY 
THIRD EDITION, REVISED AND ENLARGED 




SILVER, BURDETT AND COMPANY 
New York Boston Chicago 



JlIBRARY of C0NUSES3 
fwo Copies HeceivcK' 

JUN 10 1908 



Copyright, 1897, 1900, 1908, 
By Silver, Burdett and Company 



PREFACE. 



This work is designed for an introductory text-book 
of economic science. The first three chapters aim to 
familiarize the student with an orderly treatment of 
some leading facts in the economic history of the 
United States before the study of economic theory is 
commenced. Throughout the book economic principles 
are discussed with special reference to American con- 
ditions, and their workings are illustrated by frequent 
allusions to American experience. 

Some of the chapters treat of topics that are ex- 
tremely difficult. In such cases no attempt has been 
made to secure a false appearance of simplicity. The 
subject of public finance has been only incidentally 
touched upon. The author considers it impossible to 
discuss taxation satisfactorily without studying public 
expenditures also. To do this would have required 
more space than could be allotted to that subject. 

When many important points of economic theory are 
unsettled, as is certainly the case at the present time, 
the preparation of a text-book is not an easy task. The 
author believes that it is neither desirable nor pos- 
sible to introduce the beginner to many controversies 



4 PREFACE, 

on fundamental points of theory. For this reason he 
has been obliged oftentimes to present his own views 
much more dogmatically than he would desire to do 
under other circumstances. On practical problems, 
however, such as bimetallism and monopolies, where 
weight of opinion is nearly evenly balanced, every effort 
has been made to present both sides of the controversies. 
The author has received invaluable assistance in the 
preparation of this work. Special acknowledgment 
should be made to Professor Charles H. Hull, of Cornell 
University, to whose suggestions and criticisms this 
book owes much of whatever value it may have. The 
thanks of the author are due especially to his wife, who 
prepared nearly all the manuscript for the printer, 
lightening by one half the labor of writing this work. 

CHARLES J. BULLOCK. 

Ithaca, N. Y., April, 1897. 



PREFACE TO THE THIRD EDITION. 

In the second edition of this work the chapter upon 
value was revised and a new chapter upon public expen- 
diture and revenue was added. This third edition gives 
opportunity for thoroughly revising all statistical matter, 
inserting a discussion of the localization of industry, 
and adding a new chapter upon railroad transportation. 
Minor changes have been made in a number of other 

chapters. 

C. J. B. 

Cambridge, May, 190?^. 



CONTENTS. 



CHAPTER I. 

PAGE 

llSfTRODUCTION TO THE ECONOMIC HiSTORY OF THE 

TJnited States 11 

I. Westward Expansion 11 

II. Land Tenures in the United States ...... 14 

III. Growth of Population in the United States ... 18 

IV. Systems of Labor in the United States o . . . . 22 
Literature on Chapter I. . . . . o , . . • 30 



CHAPTER IL 

The Growth of Foundational Industries .... 32 

I. The Fur Trade and Cattle Raising 32 

IL Agriculture 35 

III. Fisheries and Mining 43 

Literature on Chapter II , 47 



CHAPTER m. 

Manufactures and Transportation 48 

I. Colonial Manufactures 48 

IL The Industrial Revolution and the Factory System . 53 

HI. Transportation . . 58 



\' 



CONTENTS. 

PA6B 

IV. Ship Building 65 

V. The Textile Industries 69 

VI. Iron and Steel Industries 74 

Literature on Chapter III • • . . . 77 



CHAPTER IV. 

The Consumption of Wealth 79 

I. Human Wants 79 

IT. Economic Goods 84 

III. The Consumption of Wealth 87 

IV. Statistics of Consumption 99 

V. Economy in Consumption. Saving and Investment . 101 

VI. Demand 110 

Literature on Chapter IV 114 

CHAPTER V. 

The Production of Wealth 115 

■^ I. Production in General ...115 

^ II. The Factors of Production 118 

III. The Localization of Industry 142 

Literature on Chapter V 148 

CHAPTER VL 

The Production of Wealth {continued) 149 

I. Organization of the Factors of Production .... 149 
IT. Stages in the Development of Production . ... 1 63 
III. Freedom in the Establishment of Productive Under- 
takings .... 166 

TV. Cost of Production 168 

V. The Investment of Labor and Capital upon Land . 170 

VT. Large-Scale Production 176 

Literature on Chapter VI. ...•...•• 185 



CONTENTS. " 
CHAPTER Vn. 

PA OB 

The Theory of Exchange • • • • • 186 

' I. Exchange in General 186 

'II. Value 189 

III. Market Value 192 

IV. Normal Value 200 

V. Exceptions to the Theory of Normal Value . . . . 215 

Literature on Chapter VII 223 

CHAPTER VIU. 

Money 221 

I. Development of Metallic Money • • 224 

\ n. The Value of Metallic Money 233 

s^ III. Debased Money. Gresham's Law ..••••• 248 

^!»-IV. Inflation and Contraction 258 

V. Government Paper Money 263 

Literature on Chapter VIH. • • 269 

CHAPTER IX. 

Money and Credit 270 

•^ I. Credit and Instruments of Credit 270 

II. Banks as Institutions of Credit 279 

III. Advantages and Disadvantages of Credit .... 284 

\ IV. Territorial Distribution of the Precious Metals . . 285 

V. Summary of the Theory of Money 288 

Literature on Chapter IX 293 

CHAPTER X. 

Monetary History of the United States. Bimet- 
allism 294 

I. Monetary History of the United States 294 

n. Bimetallism 303 

Literature on Chapter X 314 



8 CONTENTS. 

CHAPTER XL 

PAGE 

Monopolies 315 

"^ I. The Nature of Monopolies. Monopoly Value . . . 315 

•^ II. Classes of Monopolies 319 

III. General Considerations concerning Modern Monopo- 

lies 324 

IV. The Problem of Natural Monopolies 326 

V. Capitalistic Monopolies 331 

VI. Final Considerations concerning Monopolies . . • 335 

Literature on Chapter XI 342 

CHAPTER XIL 

Railroad Transportation 343 

I. Railroad Competition and Combination 343 

II. Railroad Rates 353 

III. Public Control of Railroads 361 

Literature on Chapter XII 372 

CHAPTER XIIL 

International Trade 373 

I. The Foreign Trade of the United States .... 373 

II. The Nature of International Commerce 375 

III. International Values . 380 

IV. Restriction of International Trade 387 

Literature on Chapter XIII 410 



CHAPTER XIV. 

The Distribution of Wealth 411 

I. Social Income 411 

' \. II. Private Income 414 

HI. Primary and Secondary Distribution ..,.,. 416 



CONTENTS. 9 

PAGE 

IV. General Classifieation of Private Incomes .... 421 

-- V. Interest 423 ..; 3D 

VI. Rent 435 _j ^? 

"*VII. Wages 446 

VIII. Profits 460 

Literature on Chapter XIV 467 



CHAPTER XV. 

The Wages System 468 

I. General Considerations on the Labor Contract . . . 468 

11. Labor Laws and the Labor Contract 473 

III. Labor Organizations and the Labor Contract . . . 476 

IV. The Unfavorable Relation of Laborers to the Product 

of their Labor 485 

V. Conciliation and Arbitration 489 

Literature on Chapter XV 493 



CHAPTER XVI. 

Land Nationalization. Socialism 494 

I. Land Nationalization , 494 

11. Socialism 500 

Literature on Chapter XVI 513 



CHAPTER XVIL 

The Economic Functions of Government ..... 514 

I. Economic Functions Performed by Governments . . 514 
II. Examination of Modern Theories of Governmental 

Functions 518 

III. The Several Functions of Government Considered 

from the Point of View of Individualism . . . 524 

Literature on Chapter XVII 528 



10 CONTENTS. 

CHAPTER XVIII. 

PAGE 

Governmental Expenditures and Revenues .... 529 

I. Public Expenditures 529 

II. Public Revenues 534 

III. Taxation in the United States 650 

Literature on Chapter XVIII 587 

Bibliography 589 

I. English and American Works 589 

II. Periodical Literature 604 

III. French and German Works ....... 605 

(1) French Works on Economics 605 

(2) German Works on Economics 606 

Index 609 



INTRODUCTION TO ECONOMICS 



CHAPTER I. 



INTRODUCTION TO THE ECONOMIC HISTORY OP THE 
UNITED STATES. 

I. Westward Expansion. 

§ 1. The English colonies in North America were 
planted on the mere threshold of a vast territory of con- 
tinental extent and imperial richness. Re- 

Westward 

sistlessly the line of settlement has been movement of 
pushed westward until, at the present day, ^^ 
no distinct frontier of unsettled land exists in the 
United States. This westward expansion of population 
over a vast area of free land has been the fundamental 
fact in the economic history of the country, exerting an 
influence upon almost every phase of its economic life. 

§ 2. The colonists of the seventeenth century, ad- 
vancing through the valleys of the rivers flowing 
into the Atlantic, pushed their settlements The first 
slightly beyond the " fall line," or the point JfweSrd 
where the first falls obstructed the naviga- expansion, 
tion of the rivers. The frontier of the seventeenth 
century corresponded roughly with the western border 
of the Atlantic coast region. From 1700 to 1760 the 



12 ECONOMIC HISTORY OF THE UNITED STATES. 

frontier was advanced another stage toward the west 
Emigrants gradually followed the rivers that penetrate 
the Appalachian region, and formed settlements in the 
table-lands of Pennsylvania, Yirginia, and the Caro- 
linas. In New York and New England many settlers 
pushed toward the interior of those sections. Mean- 
while, the eastern or tide water regions became an area 
of more or less continuous settlement. 

§ 3. The third stage in the advance of the frontier 
occurred between 1760 and 1790. Settlers moved 
through the valleys and mountain passes of 
and fourth the Appalachians, and emerged in Tennes- 
see, and Kentucky, and around the upper 
branches of the Ohio River. Thus the frontier passed 
over the mountains, while the area of continuous settle- 
ments advanced well into the Appalachian region. 
With the Appalachian mountains once passed, emi- 
grants moved rapidly into the Mississippi Yalley. In 
1820, Ohio, southern Indiana and southern Illinois, 
Tennessee, Kentucky, and southeastern Missouri were 
included within the settled area. West of the Missis- 
sippi and along the Great Lakes, a fourth region of 
frontier existed. 

§ 4. From 1820 to 1850 the westward movement of 

population was very rapid. The construction of the 

Erie Canal, in 1825, and the use of the 

The fifth ' ' 

and sixth steamboat upon the western rivers, facili- 

^^^' tated communication with the East, and 

stimulated the settlement of the Mississippi Yalley. By 

1850 the frontier was advanced to the eastern boundary 



WESTWARD EXPANSION. 13 

of Kansas and Nebraska, while great states had arisen 
east of the Mississippi. At the same time a new fron- 
tier of settlement was begun in California, Oregon, and 
Utah. By 1880 the territory intervening between the 
Kansas-Nebraska and the Pacific frontiers of 1850 had 
become populated, although somewhat sparsely. In 
many places frontier conditions still existed, but areas 
of thicker settlement had so broken into the old Rocky 
Mountain frontier that a distinct line of frontier no longer 
existed. The decade from 1880 to 1890 saw almost the 
complete disappearance of an " American frontier." 

§ 5. Up to the present time the economic history of 
the United States has been marked by a continual west-^ 
ward movement of population over vacant 
lands. In the future it will be altogether a of westward 
story of the more complete development of 
the territory won for the cause of civilization by the 
labors and privations of the American pioneer. The 
significance of this movement for westward expansion 
has been understood by few. For this reason, says 
Woodrow Wilson, '' the history of the country and the 
ambitions of its people have been deemed both sordid 
and mean, inspired by nothing better than a desire for 
the gross comforts of material abundance ; and it has 
been pronounced grotesque that mere bigness and 
wealth should be put forward as the most prominent 
grounds for the boast of greatness. The obvious fact 
is that for the creation of the nation the conquest of 
her proper territory from Nature was first necessary; 
and this task, which is hardly yet completed, has been 



14 ECONOMIC HISTORY OF THE UNITED STATES. 

idealized in the popular mind. A bold race has de- 
rived inspiration from the size, the difficulty, the dan- 
ger of the task. Expansion has meant nationalization ; 
nationalization has meant strength and elevation of 

view." 

n. Land Tenures in tlie United States. 

§ 6. Systems of land tenure influence powerfully the 
economic development of a country. In Europe, the 
The influence po^session of land has often conferred 
of land economic superiority and social distinc- 

tion. In the Middle Ages the large land- 
owners became the feudal rulers of Europe, while the 
small owners and the landless men were obliged to 
place themselves under the protection of some feudal 
lord, in a position of economic and social dependence. 
In modern Europe the landed aristocracy has lost most 
of its exclusive political privileges, but retains something 
of its former social superiority. Land tenures have in 
most countries remained aristocratic, — that is, such as 
to perpetuate large estates and to make difficult the 
growth of a large number of small holdings. Such 
land tenures keep the mass of the agricultural popula- 
tion of Europe in a position of economic dependence 
upon the land-owning classes. 

In the United States economic development has 

taken a different direction. In some colonies efforts 

Tenures in were made to create large estates whose 

the United proprietors should enjoy special privileges, 

states. ^ T • I 

and various conditions sometimes made it 

difficult for small proprietors to acquire titles to land. 



LAND TENURES IN THE UNITED STATES, 15 

But, in the long run, the tendency was toward a popu- 
lar system of land tenure and land transfer. After the 
Revolution, practically all traces of aristocratic land 
laws were swept from the statutes of the states. Small 
holdings had always been the rule in New England, 
while large estates became more common as one passed 
toward the South. These differences had an economic 
explanation. The more fertile lands of the middle and 
southern colonies made large farms and plantations 
profitable economically. On the less fertile soils of 
New England, smaller farms and a more careful cul- 
tivation were an economic necessity. Similar causes 
explain differences in agricultural tenures that exist 
in the country at the present day. 

§ 7. Since vacant lands abounded, the management 
and settlement of such public lands became an impor- 
tant problem early in colonial history. Majiagement 

The usual outcome was that the people ofpubuc 

lands, 
finally secured the right to acquire owner- 
ship of the vacant territory by simple methods of reg- 
istration, and by making a payment that was often 
nominal. The growth of democracy in the colonies 
made such a solution inevitable. 

The War for Independence placed in the control of 
the United States nearly all the territory now comprised 
within its limits east of the Mississippi.^ The pubUc 

The territorv west of the Alleghanies was domain of the 

^ United states, 

ceded to the national government by the 

1 On the subject of land cessions, see maps in MacCofn, Historical 
Atlas ; Hinsdale, The Old Northwest ; Gannett, The Building of a 
Nation. 



16 ECONOMIC HISTORt OF THE UNITED STATES 

states, and became a public domain. In 1785 and 1787 
Congress passed ordinances that provided for the ad- 
ministration of the Northwest Territory. These ordi- 
nances laid down the lines which the policy of tlie United 
States has always followed, in many important features. 
The lands were divided by a governmental survey into 
townships six miles square.^ Entire townships or sec- 
tions of townships were sold at public sale for not less 
than a dollar per acre. This system enabled settlers to 
locate easily in the states north of the Ohio, and conse- 
quently the flow of population into the Ohio Valley was 
very rapid. By several acquisitions the United States 
extended its territory to the present limits ; and the 
public domain included, at one time and another, 
2,889,175 square miles.^ The thirteen original states, 
together with Maine, Kentucky, and Texas, were never 
part of the public domain. Their area is about 699,000 
square miles. 

This vast public domain has been sold at public and 

at private sale at a common price of 11.25 to 12.50 per 

, . acre. Since 1862 a free homestead of not 

Disposal of 

thepubHc more than one hundred and sixty acres has 
been granted practically free of charge to 
every citizen who is the head of a family, or above the 
age of twenty-one, on condition that he shall actually 
cultivate the land for five years. Lands valuable for 
minerals, for timber or stone, for town sites, etc. have 

1 See FiSKE, Civil Government, 81-88 ; Hinsdale, The Old North 
west, 255-279. 

- For these statistics see Donaldson, The Public Domain, 10-14 ; Sato, 
The Land Question, 21-77. 



LAND TENURES IN THE UNITED STATES. 17 

been sold on special terms. Vast tracts of land have 

been given away for the purpose of assisting in the 

construction of railroads and military roads, for the 

endowment of schools and colleges, and for military 

bounties to soldiers and sailors. In these ways the 

larger part of the original domain has passed out of 

the hands of the United States. In 1894, exclusive of 

Indian and military reservations, there remained about 

850,000 square miles of public domain. To this should 

be added nearly all of the 577,390 square miles included 

in the limits of the territory of Alaska. Of the lands 

that remain, only a small part will be available for 

agricultural purposes until the arid regions of the West 

shall be irrigated. 

There have been great abuses in the administration 

of the public domain. Vast tracts of land have been 

secured by fraud, railroads and other cor- 

•; Result of the 

porations have secured land without fulfill- puwic land 

ing the conditions upon which the grants ^ ^^' 
were made, while land and timber thieves have sup- 
ported lobbies at Washington to prevent the passage 
of laws designed to protect public interests. Yet, in 
spite of all abuses, millions of settlers have found 
homes on lands secured from the United States, the 
resources of the country have been developed, and 
twenty-seven states, carved out of the public domain, 
have been admitted to the Union. On the agricultural 
lands, holdings of moderate size have been the rule ; and 
the public-land states have become composed of a large 
number of proprietors, not of landlords and tenants. 



18 ECONOMIC HISTORY OF THE UNITED STATES 

III. Growth of Population in the United States. 
§ 8. During the seventeenth century the population 
of the English colonies grew quite slowly, but from 
1700 to 1775 numbers increased rapidly. 

statistics of T . 

increase of Mr. Bancroft estimates the population in 
population. ^^^^ ^^ 1,165,000 whites and 263,000 ne- 
groes. In 1775 it had increased to 2,500,000 souls. 
The English element predominated in most of the colo- 
nies at that time, but the population was quite hetero- 
geneous. In New York the Dutch stock prevailed, on 
the Delaware River there were settlements of Swedes, in 
Pennsylvania there were many Germans, in the moun- 
tainous districts of the Appalachian frontier Scotch-Irish 
were most numerous, while the southern colonies con- 
tained many Huguenots. The First Census of the 
United States, in 1790, showed the population to be 
3,924,214. The subsequent growth of the country is 
shown in the following table : — 



Date 




Per cent 


Number of 


of 


Population. 


of 


inhabitants 


Census. 




increase. 


per sq. mile. 


1790 


3,929,214 




4.89 


1800 


5,308,483 


35.10 


6.61 


1810 


7,239,881 


36.38 


3.69 


1820 


9,633,822 


33.07 


4.76 


1830 


12,866,020 


33.55 


6.35 


1840 


17,069,453 


32.67 


8.43 


1850 


23,191,876 


35.87 


7.93 


1860 


31,443,821 


35.58 


10.84 


1870 


38,558,371 


22.63 


13.30 


1880 


50,155,783 


30.08 


17.29 


1890 


62,622,250 


24.86 


21.20 


1900 


75,568,686 


20.70 


25.60 



THE GROWTH OF POPULATION. 19 

§ 9. The enormous increase of the population of the 
United States during the last century is due partly to 
natural increase by a constant excess of 

*' Natural 

births over deaths. From 1700 to 1820 increase of 
the natural increase was very great, so that ^^ °"' 
population doubled repeatedly in periods of about twenty- 
five years. This was due to the abundance of fertile 
land which was usually accessible to every one. Food, 
clothing, and shelter could be secured very cheaply. 
An increase of numbers meant not so much an increase 
of mouths to be fed, as an addition to the productive 
labor of each family employed upon new land. Under 
such conditions marriages occurred early, families were 
large, and the natural increase of numbers was rapid. 
After 1820 it was noticed that the rate of natural 
increase began to diminish. This became apparent in 
the older and more thickly populated regions. In recent 
times tliis condition has become very general, as the pop- 
ulation of more states has become relatively dense.^ 

§ 10. Immigration has been so large that the smaller 
rate of natural increase has been less apparent than it 
would have been otherwise. From 1790 
to 1820 immigration was small, less than °™^^* °°* 
250,000 persons coming to this country during that 
period. Between 1820 and 1850 over 2,400,000 immi- 
grants arrived on our shores, and as many more came 

1 See Tucker, "Progress of the United States," 89-107, published in 
1843, for a discussion of the decreased rate of natural increase. Also 
read Mayo-Smith's '* Statistics and Sociology," chaps, v., vi., vii., and 
?iii. 



20 ECONOMIC HISTORY OF THE UNITED STATES. 

between 1850 and 1860. In the latter year more than 
thirteen per cent of the total population was estimated 
to be of foreign birth. After the close of the Civil 
War immigration assumed larger proportions than ever. 
The West welcomed immigrants, bureaus were estab- 
lished to aid them, the cost of ocean and land trans- 
portation was cheapened, and transportation companies 
made efforts to obtain passengers from foreign lands. 
In 1871, 321,350 immigrants came to this country; and 
in 1882, 788,992 arrived. Since then the annual aver- 
age has been about half a million. The whole number 
of immigrants from 1820 to 1904 has been 22,078,000. 
The Census of 1900 sliowed that the population of the 
United States fell into the following groups : — 

Native-born whites with native parents . . 41,053,417 

Native-born whites with foreign parents . 15,687,322 

Foreign-born whites 10,250,049 

Colored persons 9,312,599 

Formerly, most of the immigrants came from Ireland, 
England, and Germany. More recently, larger num- 
bers have come from the Scandinavian countries. Dur- 
ing the last decade immigration from Ireland has fallen 
off, while Austria-Hungary, Poland, and Italy have sent 
vast numbers of immigrants. 

§ 11. The general movement of population has always 

been westward, on account of the unoccupied lands of 

MobUity of the frontier. Not only immigrants, but also 

^f^the^uSted ^^^y ^^ t^® native population, have formed 

states. this stream of westward migration. No 

other country of the world has shown, at least in 



THE GROWTH OF POPULATION. 



21 



modern times, an equal amount of internal migration. 
This mobility of population has diminished the force 
of all economic shocks. In 1900 it appeared that 21.00 
per cent of the native-born inhabitants of the United 
States were living in a different state from that in 
which they were born. In 1880 it was shown that only 
one half of the people of native birth were living in the 
county where they were born. 

§ 12. In progressive countries there has appeared, in 
modern times, a marked tendency of the population to 
concentrate in cities. This has been the Growth of 
result of the development of manufactures *^^*^®^- 
and commerce, and of the improvement of transporta- 
tion facilities. The following table shows the growth of 
that portion of the population of the United States 
which lives in towns and cities of 8,000 inhabitants 
and over. In 1790 the number of such towns was six, 
in 1900 it was five hundred and forty-five. 



Census Years. 


Population 
of the 


Population 
of 


Inhabitants of 
Cities in each 100 




United States. 


Cities. 


of the 
Total Population. 


1790 


3,929,214 


131,472 


3.35 


1800 


5,308,483 


210,873 


3.97 


1810 


7,289,881 


356,920 


4.93 


1820 


9,633,822 


475,135 


4.93 


1830 


12,866,020 


864,509 


6.72 


1840 


17,069,453 


1.453,994 


8.52 


1850 


23,191,876 


2,897,586 


12.49 


1860 


31,443,321 


5,072,256 


16.13 


1870 


38,558,371 


8,071,875 


20.93 


1880 


50,155,783 


11,318,547 


22.57 


1890 


62,622,250 


18.284,385 


29.20 


1900 


75,568,600 


24,992,200 


33.10 



22 ECONOMIC HISTORY OF THE UNITED STATES. 

A comparison of different sections shows more striking 
results. In the North Atlantic States 58.60 per cent 
of the people live in cities. In Massachusetts and New 
York the numerical increase of the urban population is 
larger than the total increase of the population of the 
states, so that there has been an actual depopulation 
of the rural districts. This concentration of the popu- 
lation in cities is greatest in all the states where manu- 
facturing and commercial interests are most important. 

IV. Systems of Labor in the United States. 

§ 13. In the original colonies there was a great 

scarcity of laborers. Small proprietors cultivated their 

Scarcity of ^^^^ lands, but on the larger farms and 

laborers in plantations there was great need of addi- 

tlie colonies. . , 

tional laborers. This lack was intensified 
as other industries grew up beside agriculture. To 
supply this need immigration was encouraged, and 
various systems of obtaining laborers were developed. 

§ 14. Indentured white servants were found in 
all the colonies at an early date. They were of three 
Indentured classes. The first and principal class con- 
servants, sisted of free persons who desired to mi- 
grate to the colonies, but were unable to pay the 
expense of transportation thither. They voluntarily 
contracted with some one in America to place their 
labor at his disposal for a term of years, in return for 
his assuming the expense of transporting them to the 
colonies and supporting them during the stipulated 
terms of service. The second class was made up of 



/.ABOR SYSTEMS IN THE UNITED STATES. 23 

English political or criminal offenders, whose labor was 
sold for a term of years or for life. The third and 
least important class was composed of persons in the 
colonies who were sold into servitude for a term of 
years, either for criminal offenses or for non-payment 
of debts. Sometimes orphans were bound out to service 
in this manner. 

This system of indented servitude differed very 
materially from slavery. The term of service was 
usually from three to six years. At its character of 
close the servant was entirely free. The this system, 
rights of servants under the contracts were usually 
safeguarded fairly well. On becoming free, servants 
often rose in the social scale, even into positions of 
prominence. Many of them became free laborers, but 
the majority became landholders and swelled the number 
of small proprietors. 

Except where slavery assumed greater importance, 
the larger part of the laboring class of the colonies 
was composed of servants. In the eight- End of the 
eenth century the system of indented serv- system, 
itude declined in the southern colonies, yet it continued 
everywhere until the Revolution, when further impor- 
tations of servants from England became impossible. 
Thus the supply gradually disappeared by expiration of 
the terms of service ; yet indented servants were found 
here and there until the present century, when the sys- 
tem was abolished by law in some states. This class of 
servants had been an important addition to the labor 
force of all colonies where slavery had not assumed 



24 ECONOMIC HISTORY OF THE UNITED STATES 

greater importance. But by 1780, even in the northern 

states, the system was less profitable to employers, 

since laborers had become more abundant and it was 

less desirable to hire workmen for so long a period as 

six years. 

§ 15. Slavery differed from indented servitude in 

that the master had the legal right of ownership of the 

person of the slave. In the sixteenth cen- 
Slavery. 

tury various European nations entered upon 

the African slave trade, and introduced slaves into the 
New World. In 1619 a Dutch ship landed twenty 
African slaves in Virginia, and soon African slavery 
was introduced into the English colonies. The English 
slave trade became very large, and the government fos- 
tered it, forcing negroes upon the colonies even in 
opposition to protests and restrictive legislation. But 
the profits of the trade were so large that the colonists 
finally entered upon it. After the Revolution various 
states restricted this nefarious traffic ; and, in 1807 and 
1808, Congress finally abolished it. 

English and American traders brought thousands of 

slaves into the country ; while, in the southern colonies, 

the negroes multiplied rapidly by natural 

slavery in the increase. In the eighteenth century the 

importation of slaves gradually declined in 

the colonies north of Maryland, this tendency being 

most marked in New England. After the Revolution 

slavery was gradually abolished in the northern states. 

In 1790 the distribution of slaves among the states was 

as follows : — 



LABOR SYSTEMS IN THE UNITED STATES, 25 

New England States 3,886 

New York, Pennsylvania, and New Jersey , . . . 36,484 

Southern States 657,527 

697,897 

Up to this time the course of the institution or 
slavery had been shaped mainly by economic forces. It 
is incorrect, however, to say that moral causes that 
considerations had nothing to do with the ^sto^^o^f 
abolition of the institution in the North, slavery, 
for an opposition to slavery based upon moral and 
religious grounds commenced early in the eighteenth 
century. Moreover, this feeling was not confined 
to the North, but was shared by eminent southern 
statesmen. Said Jefferson, writing concerning slavery, 
^' I tremble for my country when I reflect that God is 
just." But back of all such considerations lay the fact 
that slavery had never been profitable in the North, 
and that in the South it had enabled the slave-owners 
to accumulate much wealth. 

Abolition, therefore, would cost the northern states 
little ; while, in the southern states, it would destroy 
millions of dollars of property. In the 

Abolition. 

South the demand for labor, to be em- 
ployed in raising tobacco, rice, and indigo, caused a 
rapid increase of slavery. In the North smaller hold- 
ings and more careful cultivation were the rule. The 
careless and indolent slave was wholly unsuited for 
such work. On small farms, also, overseers could not 
be employed, and slave labor could not be directed 
properly. Finally, the expense of feeding and clothing 
slaves was much larger in the North, while the mor< 



26 ECONOMIC HISTORY OF THE UNITED STATES. 

tality of negroes was far greater; so that the cost of 
slave labor was high and its efficiency was low. 

The result of slavery was to divide the United States 
Into two groups of states, — one dependent upon slave 

„^ , labor, the other upon free. From 1790 to 

The end ' ^ 

of the in- I860 there arose a bitter sectionalism based 
upon these differences. Slavery was for- 
bidden in the Northwest Territory, and the great states 
formed in that region entered the Union as free states. 
Into the free states the increasing tide of immigration 
flowed, population increased rapidly, and manufactures 
and commerce developed. The southern states received 
few immigrants, and fell behind the rest of the country 
in respect to the growth of population and industries. 
By 1860 the free states had a population of 19,083,927 ; 
while the population of the slave states was only 
12,315,374, of which number 3,953,696 were slaves. 
The invention of the cotton gin, in 1792, vastly extended 
the cultivation of cotton in the South, and this soon 
became the great staple crop of that section. Other 
branches of agriculture were neglected in order that 
the production of cotton might be increased. Slave 
labor was adequate to the work of producing large crops 
of cotton by wasteful surface culture extended con- 
stantly over new lands. But improved agriculture and 
mechanical or manufacturing industries, which required 
more efficient labor, could not be undertaken with the 
labor of slaves. So the South was shut up to agricul 
tural pursuits that tended toward the gradual impover- 
ishment of the soil. It could have no part in the 



LABOR SYSTEMS IN THE UNITED STATES. 27 

economic progress of the nation, and remained in 1860, 
as it had been in 1790, exclusively an agricultural 
region. Slavery had become, therefore, a distinct 
impediment to the economic progress of the South. 
The abolition of the institution freed that section from 
an absolute barrier to its further progress, and made 
possible the development, by free labor, of the manifold 
resources of the New South. 

§ 16. From the first, free laborers existed in all the 
colonies. They were often people who had been able 
to pay the expense of their passage from the 
Old World, but lacked the capital or the en- 
terprise to engage in some industry upon their own 
account. Their numbers were recruited by indentured 
servants whose terms of service had expired. The num- 
ber of free laborers varied greatly in the different 
colonies, but it was largest where slavery was least 
general, and free workers were not brought into com- 
petition with slaves. In the northern colonies free 
laborers increased rapidly during the last half of the 
eighteenth century. John Adams, writing in 1780, says 
that one cause of the opposition to slavery in Massachu- 
setts was " the multiplication of laboring white people, 
who would no longer suffer the rich to employ these 
sable rivals so much to their injury." Alexander 
Hamilton, writing in 1791, says : " There are large dis- 
tricts which may be considered as pretty fully peo- 
pled. ... If these districts have not already reached 
the point at which the complaint of scarcity of hands 
ceases, they are not remote from it." 



28 ECONOMIC HISTORY OF THE UNITED STATES. 

One cause of the scarcity of hired laborers was the 
abundance of free land. Almost any one could become 
Effect of ^ proprietor, and cultivate the soil on his 
free land. Qwn account. The land was usually fertile, 
and the return to the agriculturist was large. These 
facts made it necessary for an employer of labor to 
pay wages sufficiently high to induce people to work 
for hire, rather than to secure land and engage in 
agriculture. American wages have felt this influence 
even to the present day. Economists have found one 
explanation of the high rates of wages in this country 
in these two facts of free land and the productivity of 
American agriculture. The elder Winthrop wrote in 
1645, " Our children's children will hardly see this great 
Continent filled with people, soe that our servants will 
still desire freedom to plant for themselves, and not 
stay but for verie great wages." In 1723, a leading 
royal official wrote of the colony of New York : " North 
America containing a vast tract of land, every one is 
able to procure a piece of land at an inconsiderable rate, 
and therefore is fond to set up for himself rather than 
work for hire. This makes labor continue very dear, 
a common laborer usually earning 3 shillings by the 
day ; and consequently any undertaking which requires 
many hands must be undertaken at a far greater ex- 
pense than in Europe, and too often this charge only 
overbalances all the advantages which the country 
naturally affords, and is h-ardest to overcome to make 
any commodity of manufacture profitable which can be 
raised in Europe." From earliest times there is an 



LABOR SYSTEMS IN THE UNITED STATES. 29 

abundance of evidence to show that wages have been 
higher in the United States than in European countries. 
Within the last decade the most desirable portions of 
our public lands have been occupied, and laborers will 
have more difficulty in the future in finding an outlet in 
the unsettled regions of the West. 

In the eighteenth century there were three classes of 
free laborers. First, there were many free laborers in 
the northern colonies engaged in agriculture ^^^^^ ^^ 
or in domestic service. Such laborers, male laborers in 
and female, were usually hired by the year, 
and did not receive the highest rates of wages. In the 
southern colonies, such work was performed by slaves. 
The second class of laborers comprised those engaged in 
mechanical or manufacturing pursuits, or in trade and 
commerce. These were found in all the colonies, since 
slave labor could not be utilized for such purposes. 
This class of laborers received the highest wages and 
was always in demand, since the supply of skilled 
workmen was always inadequate. The third class was 
composed of unskilled laborers of the towns and villages. 
Their wages were sometimes high, but employment was 
irregular and their yearly income was not so large. 

The rapid growth of population during the present 

century has increased the number of laborers who 

work for hire. With the disappearance of , ^ , ^ 

^^ Labor in the 

indented servitude, free laborers formed the present 
only class of workmen in the North and ^^^^^' 
West. The abolition of slavery gave to the South the 
advantages of free labor. 



30 ECONOMIC HISTORY OF THE UNITED STATES, 



LITEEATUEE 01^ CHAPTEE I. 

On Westward Expansion : Turner, The Significance of the 
Frontier in American History; Roosevelt, Winning of the 
West, especially I. 101-133 ; Roosevelt, Thomas H. Benton, 
1-46 ; Sumner, Andrew Jackson, 1-24 ; Shaler, Kentucky, 
53-120 ; Carr, Mi-ssouri, 1-138 ; Smyth, Tour in the United 
States, I. 178-183 ; Wilson, Division and Reunion, 2-7 ; The 
Eleventh Census of the United States, Volume on Population, 
XVIIL-XXXVT. 

On Land Tenures : Maine, Early History of Institutions, 98- 
118; Leslie, Land System of Ireland, England, and Continental 
Europe; Pollock, The Land Laws; Mill, Political Economy, 
Bk. II. Chaps. 6, 7, 8, 9, 10; Jones, Peasant Rents; Probyn, 
Systems of Land Tenure ; Cheyney, Early American Land Ten- 
ures ; Cheyney, The Anti-Rent Agitation in New York ; Egles- 
ton, The Land System of the New England Colonies; Doyle, 
The English Colonies in America ; Weeden, Social and Economic 
History of New England ; Bruce, Economic History of Virginia ; 
WiLLOUGHBY, Government and Administration in the United 
States, 107-110; Donaldson, The Public Domain; Sato, His- 
tory of the Land Question in the United States ; Hinsdale, The 
Old Northwest ; Gannett, The Building of a Nation ; Johnson's 
Universal Cyclopaedia, VITL 359-360. 

On the Growth of Population: Eleventh Census of the 
United States, Volume on Population ; Bancroft, History of the 
United States, I. 602, II. 389, 390, IV. 52 ; Tucker, Progress of 
the United States ; Smith, Statistics and Sociology ; Smith, Emi- 
gration and Immigration ; Whitney, The United States, Supple- 
ment, 1-25 ; Gannett, The Building of a Nation, 51-129 ; Ket- 
tell, " Immigration," in Eighty Years' Progress, I. 228-244 ; The 
Statistical Abstract of the United States, 1894, 4 and 5. 

On the Labor System: Waltershausen, Die Arbeits- 
Verf assung der Englischen Kolonien in Nordamerika ; Lodge, 
History of the English Colonies in America ; Doyle, The English 
Colonies in America; Bancroft, History of the United States i 



LITERATURE. 31 

Bruce, Economic History of Virginia ; Weeden, Economic and 
Social History of New England ; Wright, Industrial Evolution 
of the United States ; Ballagh, White Servitude in the Colony 
of Virginia; Basset, Slavery and Servitude in IN'orth Carolina; 
Brackett, The Negro in Maryland; Ingle, The Negro in the 
District of Columbia; Tremain, Slavery in the District of Co- 
lumbia; Steiner, History of Slavery in Connecticut; Eighty 
Years' Progress, I. 103-122 ; Moore, History of Slavery in Massa- 
chusetts ;■ Tucker, Progress of the United States, 108-118; Hins- 
dale, The Old Northwest, 345-367; Ingle, Southern Sidelights; 
Lalor's Cyclopaedia of Political Science, " Slavery " ; Kalm, Trav 
els into North America, I. 303 ; Oldmixon, British Emph-e in 
North America ; Ingram, History of Slavery ; Mill, Political 
Economy, Bk. II. Chap. V. ; Roscher, Political Economy, I. 207- 
234. 

Note. — Students should consult the maps in the Eleventh 
United States Census Report on Population, pages XII.-XXVIIL, 
for illustration of the westward movement of the frontier. 



32 ECONOMIC HISTORY OF THE UNITED STATES, 



CHAPTER II. 

THE GROWTH OP FOUNDATIONAL INDUSTRIES. 

I. The Fur Trade and Cattle Raising. 

§ 17. The development of the industries of the United 

States has been described in the following words : ^ 

" The United States lies like a huo^e pa^e in 

The develop- » r o 

mentof in- the history of society. Line by line as we 
«s les. YQd^di from west to east we find the record of 
social evolution. It begins with the Indian and the 
hunter ; it goes on to tell of the disintegration of sav- 
agery by the entrance of the trader, the pathfinder of 
civilization ; we read the annals of the pastoral stage in 
ranch life; the exploitation of the soil by the raising 
of unrotated crops of corn and wheat in sparsely settled 
farming communities ; the intensive cultivation of the 
denser farm settlement ; and finally, the manufacturing 
organization with city and factory system." 

§ 18. The earliest English colonists began to traffic 

with the Indians for peltry. In New England the fur 

The fur trade furnished the earliest basis for the 

trade. foreign commerce of that region. In New 

York the Dutch and the English fur traders pushed 

up the Hudson River, reaching, through the Mohawk 

1 Turner, Significance of the Frontier in American History. 



THE FUR TRADE. 33 

Yalley, the Great Lakes and the Illinois country. In 
Virginia the traders crossed the Alleghanies by the close 
of the seventeenth century, and later explored the moun- 
tains of Tennessee and the Carolinas. In the Caro- 
linas the colonists began at an early date to compete 
with the Yirginians for the trade with the Indians of 
the Southwest. Meanwhile, in the Mississippi Valley, 
the French extended their traffic with the Indians, dot- 
ting the interior of the continent with their trading 
posts. For the control of this valuable trade the English 
and French contended until the French and Indian War 
wrested this territory from France. 

In the early history of this country the fur trade 
was important because it furnished a valuable industry 
which aided in building up a thriving com- Economic 

merce. But more than this, it prepared the significance of 
„ . . . the fur trade. 

way for the advance of civilization across the 

Appalachian ranges. The fur traders, following Indian 
trails,^ planted the first posts in the outlying western 
wilderness. In their track, hunters and trappers fol- 
lowed. As numbers grew and game became scarce, 
both traders and hunters moved on into the wilderness. 
Their places were soon taken by the cattle raiser, and 
then by the farmer ; and settled communities grew up. 
The trading post, therefore, located at some convenient 
place along an Indian trail or a river course, became the 
nucleus of a new area of settlement. 



1 See EoosEVELT, Winnin^^ of the West, i. 251, 314, ii. 328 ; Speed, 
The Wilderness Road ; also the speech by Senator Benton, quoted by 
Turner in "The Indian Trade." 72, 73. 



34 ECONOMIC HISTORY OF THE UNITED STATES. 

This process has been repeated at each step in the 
settlement of the West. After the Revolution, the set- 
tlers in the Mississippi Valley followed the 

Later history , -,-.,,, it-, , . -. 

of the fur paths marked by the early French traders. 

trade. -^^^ Orleans and Mobile were the centers of 

the Indian trade in the southern part of the Valley, 
while the region of the Great Lakes was the seat of 
perhaps the greatest fur trade of the world. From Ohio 
to Wisconsin six hnes of rivers furnished water routes 
from the Lakes to the Mississippi.^ At these points 
old trading posts rapidly developed into important 
towns. Beyond the Mississippi, fur traders ascended the 
Missouri, penetrated the Rocky Mountains, and guided 
the earliest exploring expeditions and first immigrant 
trains through the mountain passes to the Pacific coast. 
Of this trans-Mississippi trade St. Louis was long the 
center, since the Missouri River gave it access to the 
entire Northwest. Along this route the Pacific Fur 
Company sought to establish a line of trading posts con- 
necting its station at Astoria, Oregon, with the Mis- 
sissippi Valley .2 

§ 19^ Cattle grazing has often been a special industry 

in the United States, and has an economic significance 

Cattle distinct from that of agriculture. European 

raising, cattle were imported into both Spanish and 

English colonies at an early date. In Virginia and the 

Carolinas cattle raising soon became distinctly a frontier 

1 See Turner, Character of the Indian Trade, 21 ; Hinsdale, Old 

Northwest, first map. 



AGRICULTURE. 35 

industry. Cattle were turned loose in the forests, where 
thej multiplied rapidly. Advancing settlements pushed 
the large herds of cattle westward, where vacant lands 
abounded. In 1770 Wynne described the large herds, 
often numbering one thousand cattle, that were common 
in the Carolinas. A few years later Smyth gave an 
account of cattle raising on the Carolina frontier, where 
vast numbers of horses, cattle, sheep, and hogs were 
turned loose in the forests and savannas. Each owner 
branded his cattle with a brand which was recorded by 
the clerk of the county court. West of the Alleghanies the 
cattle raisers occupied new lands some time in advance of 
the coming of a settled agricultural population. Across 
the Mississippi the same process has been repeated ; and, 
at the present day, cattle raising is carried on as a separate 
industry on the ranges of most of the Western States. 
It has gradually declined as the growth of a farming 
population has diminished the land available for grazing. 
In 1880 about 3,750,000 cattle and 7,000,000 sheep 
remained on the western ranges. 

II. Agriculture. 

§ 20. Agriculture has always been the largest single 
industry of the United States. The first task of the 
American settler has been to clear away the production of 
forests and bring the land under cultivation. ^^ cereals. 
The earliest English colonists endeavored to raise such 
crops as would furnish an adequate food supply. For 
this purpose maize, or Indian corn, proved best adapted. 
The colonists learned from the Indians how to plant 



36 ECONOMIC HISTORY OF THE UNITED STATES. 

this hardy cereal, and secured large crops of corn, which 
became their most important article of food. At every 
stage of westward migration the same process has been 
repeated. Before the forests have been wholly cleared, 
corn has been sown in partial clearings, pumpkins and 
beans have been planted in the same patches of land, and 
an abundant food supply has been secured. When the 
fertile and open prairies of the Mississippi Valley were 
reached, the production of corn greatly increased ; and 
the United States became able to supply large amounts 
for export. In 1906 the value of the corn and corn meal 
exported from this country was 163,685,000. In that year 
the corn crop amounted to 2,927,000,000 bushels, and its 
value was about 11,166,000,000. The cultivation of wheat 
has been extended continuously since the early days of 
colonization, although Indian corn proved a more reli- 
able crop at first. Wheat and flour were exported from 
the middle colonies at an early date, and at the close of 
the eighteenth century New Jersey, Pennsylvania, and 
New York were the granary of the United States. Early 
in the present century the fertile prairies of the Ohio 
Yalley began to yield large amounts of wheat. Between 
1830 and 1850 exports of wheat and flour increased 
from 23,385,000 to 71,000,000 bushels. The culture 
of wheat has moved steadily westward. Minnesota, 
Nebraska, Kansas, and the Dakotas now form the gran- 
ary of the United States. Exports of wheat amounted 
to 34,973,000 bushels in 1906. For the year last men- 
tioned the wheat crop of this country was estimated at 
735, 260,000 bushels, valued at 1490,332,000. For a long 



AGRICULTURE. 37 

time large crops of oats, barley, rye, and buckwheat have 

been raised in the United States, but the oat crop alone 

approaches in value the corn and wheat crops. In 1906 

this country produced 964,000,000 bushels of oats, valued 

at 1306,000,000. 

§ 21. In the northern portions of the United States, 

special attention has been given to the grass and hay 

crop, since it has been necessary durino; the 

, . P -, 1. \ Production 

long winters to teed live stock upon hay of grass 
stored up in the summer months. In New ^^^^• 
England and some of the middle colonies great difficulty 
was experienced at first in providing sufficient food for 
live stock during the winter, and the animals often died 
of starvation. Near the coast a scanty supply of salt 
hay was secured from the salt marshes, but in the 
thickly wooded regions of the interior even this resource 
was lacking. Hayfields gradually appeared as the for- 
ests were cleared, but the quality of the grass was usu- 
ally poor. In 1750 timothy grass was introduced, and 
half a century later clover began to be generally culti= 
vated. Since then the quantity and quality of the grass 
crop has steadily improved. In the prairies of the Mis- 
sissippi Yalley no such difficulties were encountered by 
the settlers, since a luxuriant growth of grass was found 
in those regions. At the present day grass and hay 
form the largest crop raised in the country. In 1906, 
after our pasture lands had furnished pasturage during 
the months when grazing was possible, the hay crop was 
valued at 8592,000,000. 

§ 22. In the first century of settlement many of the 



38 ECONOMIC HISTORY OF THE UNITED STATES. 

fruits and vegetables known in Europe were introduced 
vegetawes ^^^^ ^^® colonies. Little attention was paid 
and fruits. ^q the development of fine varieties of fruit 
until the present century, during which the fruit crops 
have increased constantly in importance. The cultiva- 
tion of nearly all vegetables has been very widely ex- 
tended, but the white and the sweet potato have formed 
the most important crops, furnishing a considerable part 
of the food supply of the country. In 1906 the potato 
crop was valued at 1157,000,000. 

§ 23. The cultivation of flax and hemp was com- 
menced in America early in the seventeenth century, 

and many of the colonies attempted to stim- 
Production . "^ . 

of vegetable ulate it by means of bounties. The entire 

^'^' hemp crop has never been large, however, 

and it has diminished for the last thirty years. Ken- 
tucky and a few states of the Mississippi Valley produce 
about all the hemp raised in the country at the present 
time. Flax has always been raised in larger quantities, 
and has been much used in the manufacture of home- 
spun cloth. For nearly forty years the flax crop has 
steadily decreased in all sections except the states of 
the Mississippi Valley. The production of cotton was 
stimulated between 1770 and 1790 by the invention of 
improved machinery for spinning and weaving that fiber. 
From New Jersey to Georgia experiments were made in 
cotton culture ; and in the coast regions of the South 
Atlantic States a very fine variety, known as " sea island 
cotton," was developed. On the uplands in the interior 
there was raised an inferior grade, whose use was limited 



AGRICULTURE. 39 

by the fact that its short fibers could be separated from 
the seeds only by an expensive and laborious process. 
In 1792 Eli Whitney invented a cotton gin which per- 
formed this work very easily. This made the upland 
cotton available for exportation to the English market, 
where the demand was rapidly increasing. Between 
1792 and 1800 the cotton exports from the United States 
increased from 130,000 to 13,000,000, and by 1810 the 
crop was valued at 115,000,000. Cotton culture was 
extended rapidly in the Gulf States, so that in 1859 the 
crop was valued at more than 1200,000,000. Most of 
this cotton had been exported to England, and it was to 
the planters of the cotton states what tobacco had been 
to the colony of Virginia. Other industries had been 
neglected for the one business of cotton raising. The 
extension of cotton culture made slave labor very profit- 
able to the planters, and fastened the institution of sla- 
very more firmly onto the economic life of the South. 
The substitution of free labor for slave, since the Civil 
War, placed no permanent check upon the cultivation of 
cotton. In 1905 the crop amounted to 10,804,000 
bales, valued at 1632,000,000. Texas, Mississippi, Ala- 
bama, and Georgia led in the production of this great 
staple product. 

§ 24. About 1750 the sugar cane was introduced into 
some of the Gulf States. While other states have ex- 
perimented with this industry, it has shown 
^ -' ' Production of 

constant growth in Louisiana only, where sugar, rice, 
, J. , 1 . • T T 1. and tobacco, 

most 01 the crop is now raised. In recent 

years sorghum has been cultivated in a number of 



40 ECONOMIC HISTORY OF THE UNITED STATES. 

states, while the sugar beet has been introduced in 
Nebraska and California, But the entire product has 
furnished only a small part of the sugar consumed in the 
United States. Rice has been produced in large quanti- 
ties in the coast districts of the Carolinas, Georgia, and 
Florida. Tobacco has always been an important crop 
in certain sections of the country. In Virginia and 
Maryland it early became the principal product. A 
superior quality of tobacco could be raised on the rich 
soils of those colonies, while the London market fur- 
nished a constant demand. With this crop the planters 
of those colonies paid easily for large quantities of man- 
ufactured supplies imported from England. For two 
centuries the entire economic life of Virginia centered 
around the production of tobacco for the foreign market. 
The Middle Atlantic States finally commenced the cul- 
tivation of tobacco, and it has extended into New Eng- 
land and the Mississippi Valley. The crop has always 
tended to exhaust the fertility of the soil, and its con- 
tinued cultivation has usually made it necessary to resort 
constantly to new lands. In 1906 the tobacco crop of 
the United States was valued at about 168,232,000. 
The State of Kentucky produced more than one third 
of the entire crop. 

§ 25. Stock raising has always been a part of 

American agriculture, and live stock products form a 

other impor- ^C)st important part of the agricultural prod- 

tant products, ^ce of the country. Billions of gallons of 

milk and more than a billion pounds of butter and 

cheese are furnished by the dairies each year. Hams, 



AGRICULTURE. 



41 



bacon and lard, live cattle, and dressed beef are ex* 
ported in great quantities after the domestic demand 
has been satisfied. Wool is raised in large amounts, al- 
though a considerable part of our entire supply has been 
imported. Poultry and eggs are other important products, 
the value of which in 1900 was 1281,000,000. 

§ 26. Agriculture in the United States has been 
carried on chiefly by proprietors, not by agricultural 
tenants. The result of popular systems of -^^^ 
land tenure has been that we ''have mil- tenures. 
lions of farms just large enough to profitably employ the 
labor of the proprietor and his growing sons ; while we 
have also multitudes of considerable estates upon which 
labor and moneyed capital, live stock, and improved 
machinery are employed under skilled direction ; and we 
have, lastly, those vast farms, the wonders of the world, 
in Illinois and California, where 1,000 or 5,000 acres are 
sown as one field of wheat or corn ; or, as on the Dal- 
rymple farms in Dakota, where a brigade of six-horse 
reapers go, twenty abreast, to cut the grain that waves 
before the eye almost to the horizon." The following 
statistics from the Census of 1900 show the character of 
our agricultural tenures : — 



Tear. 


Number of 

Farms cultivated 

by Owner. 


Number of 

Farms rented 

for Money. 


Number of 

Farms rented 

for Share of 

Products. 


1880 
1890 
1900 


2,984,306 
3,269,728 
3,713,371 


322,357 
454,659 

752,920 


702,244 

840,254 
1,273,366 



42 ECONOMIC HISTORY OF THE UNITED STATES. 

§ 27. The most striking feature of American agricul- 
ture has been that an abundance of fertile land has 

Extensive encouraged extensive methods of farming. 

cultivation, p'rom the fertile soil of new fields, large crops 
have been raised with little or no attempt to renew or to 
enrich the land. When in this manner the fertility of 
one field has been exhausted, another has been brought 
into cultivation. In older countries, where land is scarce, 
a more careful, intensive form of cultivation is necessary ; 
and the farmer is obliged to return to the soil, by means 
of fertilizers, the various mineral ingredients that are 
taken from it by each year's crops. European writers 
have called the American practice " wasteful, wanton 
earth-butchery," and have criticised Americans for per- 
sisting " in taking up fresh land instead of the more 
costly process of manuring a worn-out soil." But it 
should be remembered that we have been rich in fertile 
lands, and until recent times poor in most other kinds 
of wealth. Our extensive agriculture has converted a 
portion of the natural fertility of our soils into other 
kinds of wealth that were less abundant. In the older 
sections of the country intensive cultivation has long 
been practiced. After the great staple crops of corn and 
wheat have been raised for successive years with the 
smallest expenditure of capital and labor, the soil becomes 
perceptibly impoverished ; and the production of grain 
moves steadily westward toward unoccupied territory. 
Then, on the older lands of the East begins a more care- 
ful, intensive cultivation of smaller crops, vegetables, 
fruits, or grass for the support of the dairy. On the 



MINING 43 

better portion of these lands cereal crops are still raised 
by higher cultivation, while the poorer soils are often 
allowed to revert to forest. In the vicinity of towns and 
cities market-gardening allows a still more intensive 
application of labor and capital. On the newer lands of 
the West extensive farming, for some time to come, may 
suffice for the production of large staple crops ; but in 
most parts of the United States the agriculturist must, 
in the future, resort to scientific soil cultivation. In 
this direction much has been done already. During the 
present century experiments and innovations have rap- 
idly increased, while agricultural societies and publica- 
tions have diffused knowledge of improved methods. 
In the invention and practical use of agricultural machin 
ery the United States has led the world. 

III. Fisheries and Mining. 

§ 28. The rivers of most of the colonies abounded in 

fish, but New England possessed sea fisheries that formed 

the basis for a profitable commerce with the 

Fisheries. 
West Indies and with Europe. Thousands 

of hardy fishermen pushed their voyages as far as the 

Banks of Newfoundland, where there were the greatest 

sea fisheries of the world. The cod fishery has been the 

most important of these, although the whale fishery 

enrolled vessels of a greater tonnage from 1840 to 1858. 

During the last thirty years the character of the fishery 

interests of the United States has changed. The shore 

and inland fisheries have been developed into greater 

commercial importance than those of the deep sea. In 



44 ECONOMIC HISTORY OF THE UNITED STATES. 

1871 the United States Fish Commission was estab- 
lished. This body has been successful in propagating 
artificially more than forty kinds of fish. In the year 
1906 the exports of fish and fish products amounted to 
17,559,000. 

§ 29. Iron was the first metal to be produced success- 
fully in the English colonies. By 1650 Massachusetts 
Mining had established the industry of smelting iron 

industries. ^^.^^ ^^^ u^^^ ores " that were found in 

marshes and at the bottom of ponds. The iron industry 
gradually spread through the other colonies, and became 
especially important in the middle colonies. Pig and 
bar iron were exported to England from 1718 to the 
time of the Revolution. Copper and lead were mined 
in small quantities in some of the colonies, but other 
attempts at mining met with little success. In the 
upper Mississippi region, lead was mined by the French 
and Spanish ; but the vast stores of mineral wealth 
around Lake Superior remained untouched by European 
colonists. 

Early in this century gold was discovered in the Caro- 
linas and Georgia, where about 124,000,000 worth of the 
Development 7^^^°^' ^^tal was mined up to 1847. Mean- 
of mining, while the lead mines of the upper Mississippi 
were developed quite rapidly. In 1820 
anthracite coal fairly began to be mined in Pennsyl- 
vania, and the coal fields of that state began to be opened 
up. This caused a rapid expansion of the iron industry. 
About 1840 coal was first used in smelting pig iron, 
and the production of iron greatly increased. It more 



MINING. 



45 



than doubled between 1828 and 1842. Smelting by 
charcoal still continued, however, in those states where 
wood was abundant. After 1830 geological surveys 
were established in many states, and the mineral 
resources of the country were explored more systematic- 
ally. Between 1845 and 1850 copper mining was 
commenced in the Lake Superior district. The copper 
product of the country increased from almost nothing 
to more than 8,000 tons in 1860. Meanwhile gold had 
been discovered in California, and the gold product of 
tlie United States increased from 1889,000 in 1847 to 
165,000,000 in 1853. This last figure was nearly five 
times the annual product of the world from 1800 to 
1845. Fifteen years later, silver was discovered in 
Nevada. By 1860 the mineral resources of the United 
States were fairly beginning to be developed. 

Since 1860 the growth of the mining industries of the 
country has been constant. The output of coal has 
increased until it forms the most valuable 

Mining: 

mineral product of the United States. In industries 
1905 the statistics of the production of coal ®"*^^ ^^^ 
were as follows : — 



Kind. 


Tons Produced. 


Tons Marketed. 


Value at Mines. 


Bituminous . . 
Anthracite . . . 


281,414,000 
69,406,000 


275,225,000 
63,067,000 


$334,877,000 
$141,879,000 



Pennsylvania produced practically all of the anthracite 
coal, and more of the bituminous than any other state 



46 ECONOMIC HISTORY OF THE UNITED STATES. 

Iron mining has advanced as steadily as coal mining. 
The output of iron ore increased from about seven mil- 
lion tons in 1880 to sixteen million tons in 1890. In 
1905 the output was 42,526,000 tons. Michigan and 
Minnesota produce more than two thirds of the total 
product, while Alabama occupies third place. Copper 
mining has developed wonderfully. The Lake Superior 
mines have now been equaled, temporarily at least, by 
those of Montana. Lead and zinc have been mined 
steadily, Missouri retaining its importance in this in- 
dustry. In the production of gold and silver the United 
States has held a position of great importance, although 
within recent years the mines of Australia and South 
Africa have yielded larger amounts of gold. In the 
production of silver this country has led all others.^ 
While it is impossible to mention all the mineral prod- 
ucts of the country, the growth of the petroleum in- 
dustry should be noted. In 1905 the product of crude 
petroleum was valued at eighty-four million dollars. 
In 1905 the total value of the crude mineral products 
of the United States was estimated to be more than 
sixteen hundred million dollars. 

1 In 1905 the world's gold product was $377,000,000, of which the 
United States produced $88,180,000. In the same year the world's silver 
product was valued at $102,314,000," of which the United States produced 
$34,222,000. 



LITERATURE 47 



LITERATUEE ON CHAPTER II. 

On the Fur Trade : Turner, Character and Influence of the 
Indian Trade in Wisconsin ; Turner, The Significance of the 
Frontier in American History, 89-92 ; Weeden, Economic and 
Social History of New England ; Beer, The Commercial Policy 
of England toward the American Colonies, 57-62 ; Eighty Years' 
Progress, II. 343-347 ; Thwaites, The Colonies, see Index. 

On Cattle Raising : Turner, Significance of the Frontier in 
American History, 92-93; Bruce, Economic History of Virginia; 
Weeden, Economic and Social History of New England; Smyth, 
Tour in the United States, I. 140-146, II. 78-79 ; Wynne, British 
Empire in America, II. 288; Eighty Years* Progress, I. 37-68; 
Tenth Census, IH. 953-1116; Nimmo, Report on Range and 
Ranch Cattle Business; Salmon, Report on the History and 
Condition of the Sheep Industry in the United States. 

On Agriculture: Weeden, Economic and Social History of 
New England ; Bruce, Economic History of Virginia ; Ramsay, 
History of South Carolina, H. 199-231 ; Smyth, Tour in the 
United States, I. 288-299, II. 56-76, 110-140; Eighty Years' Prog- 
ress, I. 19-131 ; Bolles, Industrial History of the United States, 
1-181; Ingle, Southern Sidelights, 47-66; Shaler, The United 
States, I. 375-416, II. 54-57, 525-527, 617-621 ; Whitney, The 
United States, Part IX. ; Tenth Census, III. p. XXVIII.-XXXIII. ; 
Eleventh Census, Volume on Agriculture ; Statistical Abstract of 
the United States, 1895. 

On Fisheries : Weeden, Economic and Social History of New 
England ; Eighty Years' Progress, II. 378 et seq. ; Goode, The 
Fisheries and the Fishery Industry of the United States; Eleventh 
Census, Report on Fisheries. 

On Mining: Weeden, Economic and Social History of New 
England; Eighty Years* Progress, II. 17-170; Swank, History of 
the Manufacture of Iron ; Bolles, Industrial History of the United 
States, 667-780 ; Wright, Industrial Evolution of the United 
States, 80-103 ; Shaler, The United States, I. 417-484 ; Whit- 
NEY, The United States, 259-368 ; Report upon the Production o 
the Precious Metals; Statistical Abstract, 1895. 



48 ECONOMIC HISTORY OF THE UNITED STATES. 



CHAPTER III. 

MANUFACTURES AND TRANSPORTATION. 
I. Colonial Manufactures. 

§ 30. The poverty of the American colonists an(5 
their remoteness from the English market compelled 
Household them to undertake the work of converting 
industries. p^w materials into finished products. Many 
kinds of manufactures had their beginning within the 
household. Soap making, candle making, dressing and 
manufacturing leather, the work of the carpenter and 
the smith, spinning yarn, weaving homespun cloth, mak- 
ing clothes and hats, and many other industries were 
carried on within the family. The larger farms and 
plantations, equipped with tool houses, forges, grist 
mills, and saw mills, were almost self-sustaining eco- 
nomic units. This lasted until the close of the eight- 
eenth century. 

§ 31. Yet, even in the early days, various manufac- 
tures were carried on for commercial purposes, not for 
Production for consumption within the household. Salt 
the market, and iron works were established for the 
purpose of supplying the domestic market. Brick mak- 
ing, cordage making, tanning, and other industries 
became important commercially. Saw mills and grist 



COLONIAL MANUFACTURES. 49 

mills were run for public as well as domestic supply. 
Thus began a division of occupations, which was 
carried further when increasing numbers of artisans 
devoted themselves to the trades of the blacksmith, 
carpenter, wheelwright, shoemaker, cooper, sawyer, 
shipwright, bricklayer, etc. Such workmen performed 
much work that had been done formerly upon the 
farm. 

An abundant supply of timber made it possible to 
establish various manufactures of wood. From pipe- 
staves and clapboards to wagons and ships, p . , ^ 
many of the colonies supplied the domestic ufacturing 
demand, and had a surplus for export. The 
manufacture of iron was firmly established between 
1650 and 1750. In some places rolling mills converted 
the iron into sheets and bars, while slitting mills cut it 
into rods. Wroiight-iron nails, household utensils, and 
many kinds of tools were produced ; and the manu- 
facture of arms and cannon was begun. During the 
Revolution the iron industry stood the country in good 
stead. The textile industries also became important. 
The first colonists, with spinning wheel and hand loom, 
began to spin flax, hemp, cotton, or wool into yarn, 
and to weave the yarn into cloth. Gradually fulling 
mills were built, where homespun fabrics were rolled 
and pressed in hot suds and fuller's earth in order to 
thicken the goods and increase their weight. In the 
eighteenth century a number of factories produced cloth 
for the market. The colonists probably produced three 
fourths of the cloth consumed by them. The fmef 



50 ECONOMIC HISTORY OF THE UNITED STATES, 

grades of cloths were always imported from England, 
but the majority of the people depended upon the 
coarser domestic fabrics. The manufacture of cordage 
and sail cloth was an important auxiliary of the ship- 
building industry. Boots and shoes were important in 
inter-colonial trade as early as 1700. Lynn, Massa- 
chusetts, was a center for this branch of manufacture. 

*■ 
Of other industries, paper making, printing, and pub- 
lishing, and the manufacture of glass, pottery, and hats 
were the most important. 

§ 32. This development of colonial manufactures 
took place not only in the face of English competition, 
The attitude ^^^ ^^ ^P^*^ ^^ repeated attempts to destroy 
of England, these industries. The commercial policy of 
England was to limit the colonies to the production of 
raw materials useful to English manufacturers, and to 
reserve the colonial market exclusively for the sale of 
English manufactured products. As early as 1699 
Parliament prohibited wool or manufactured woolen 
goods from being exported from any of the colonies. 
In 1731 the exportation of hats was prohibited, and the 
industry was placed under oppressive restrictions. In 
1751 Parliament forbade the erection of new iron fur- 
naces, forges, rolling mills, or slitting mills, with the 
purpose of restricting the colonies to the production 
of pig and bar iron. Although these restrictions were 
evaded, they were an obstacle to the development of 
colonial industries. 

§ 33. Manufactures were further developed in the 
northern colonies than in the southern, where the energy 



COLONIAL MANUFACTURES. 51 

of the people was occupied with the cultivation of tobacco 
and rice. Even in the northern colonies, fisheries, ship 
buildino; and commerce with the West In- ^^^ ^ ^ 

° other ot)sta- 

dies absorbed a large portion of the available cies to manu- 
labor and capital. Finally, in all sections 
of the country, scarcity of labor and high wages hin- 
dered manufacturing enterprises. The high rate of 
American wages has existed since the earliest times,^ 
and was a matter of record as early as 1645. It was 
due to the productiveness of labor employed upon new 
land. Laborers would not enter other industries un- 
less employers could afford to pay as high wages as 
could be secured in agriculture. An industry could be 
established only when the superior efficiency of labor, or 
some other advantage, enabled the employer to pay the 
prevailing high wages. 

§ 34. Although the United States imported from 
England a large part of its manufactured supplies, yet 
Alexander Hamilton, in 1791, could give ^^ , 
the following account of American man- Report on 
ufactures : ^ ''To all the arguments which 
are brought to evince the impracticability of success in 
manufacturing establishments in the United States, it 
might have been a sufficient answer to have referred to 
the experience of what has been already done. It is 
certain that several important branches have grown 
up and flourished with a rapidity which surprises, at 

1 See page 28. 

2 See " Report on Manufactures," in Taussig, State Papers and 
Speeches on the Tariff, 48, 49. 



62 ECONOMIC HISTORY OF THE UNITED STATES, 

fording an encouraging assurance of success in further 
attempts. Of these it may not be improper to enumer- 
ate the most considerable." These were in substance as 
follows : — 

1. Leather, shoes, harness, trunks, gloves, glue, etc. 

2. Iron bars and sheets, steel, nail rods and nails, imple- 
ments of husbandry, artificers' tools, household utensils, 
arms, etc. 

3. Ships, cabinet and coopers' wares, wool and cotton 
cards, machinery for manufactures and agriculture. 

4. Manufactures of flax and hemp, cables, cordage, sail- 
cloth, twine, etc. 

5. Bricks, coarse tiles, and potters' wares. 

6. Ardent spirits and malt liquors. 

7 . Writing and printing paper, wrapping paper and paste 
board, paper hangings. 

8. Hats of fur and wool. 

9. Refined sugars. 

10. Oils, soap, tallow candles. 

11. Copper and brass wares. 

12. Tin wares. 

13. Carriages of all kinds. 

14. Snuff, chewing and smoking tobacco, 

15. Starch and hair powder. 

16. Lampblack and painters' colors. 

17. Gunpowder. 

" Besides manufactories of these articles, which are 
carried on as regular trades, and have attained to a con- 
siderable degree of maturity, there is a vast scene of 
household manufacturing, which contributes more largely 
to the supply of the community than could be imagined 
without having made it an object of particular inquiry." 



THE INDUSTRIAL REVOLUTION. 53 

II. The Industrial Revolution and the Factory System. 

§ 35. While the American colonies were struggling 
for independence, there began in England a series of 
economic changes which ultimately trans- 
formed completely English industry and Revolution 
commerce. These changes constituted the ^^"s;iaiid. 
Industrial Revolution. Between 1790 and 1850 the 
United States was affected by the same influences. For 
this reason, we must now consider briefly the course of 
the Industrial Revolution in England. 

The economic condition of England in 1760 was prim- 
itive when compared with the present order of things. 
Manufactures were carried on mainly bv 

-' -' English 

hand, and water or horse power was seldom manufactures 
utilized. The woolen industry was the prin- °' 

cipal branch of manufacture, the iron trade coming next 
in importance, while manufactures of silk, linen, and cot- 
ton were much smaller. The textile industries were 
carried on often in country districts in combination with 
agriculture. The men of a household attended to the 
farm, while the women and children spun yarn for sale. 
Weaving usually occupied the men during the winter. 
In all industries the tools and machinery were sim- 
ple, so that a person needed but little capital in order to 
become an independent producer and the employer of a 
few journeymen and apprentices. After 1740 the iron 
trade began to decline, because it was no longer possible 
to secure supplies of wood sufficient to furnish charcoal 
for smelting iron ores. 



64 ECONOMIC HISTORY OF THE UNITED STATES. 

In 1760 the entire foreign commerce of England 

amounted to about $120,000,000, a very small figure 

when compared with the development of the 

Commerce and 

transportation next fifty years. Domestic commerce was 
^ ' restricted by the difficulty of inland trans- 

portation. Eoads were very bad, while the construction 
of canals had only commenced. London was the only 
national market, where products of all sections were ex- 
changed ; and the rest of the domestic commerce was 
carried on through a few local markets, through annual 
fairs, or through traveling merchants. 

Labor and capital were hampered by many restrictions. 
In most towns industries were under the control of ex- 
Legai position clusive guilds, wliich supervised prices, qual- 
? u^^i^*^ ity of goods, and many details of business. 
1760. In such towns no one could engage in any 

trade without becoming a member of the guild, and serv- 
ing an apprenticeship of seven years. Laborers could not 
move from one parish to another, unless they could give 
guarantees that they would not become dependent upon 
the poor rates of the parish in which they settled. They 
were forbidden to form associations for any purpose, 
while justices of the peace were empowered to regulate 
wages. Joint-stock corporations hardly existed in any 
industries except banking, insurance, and foreign trade. 
Adam Smith, in 1776, could appeal to experience to 
prove that such companies, whose hired managers con- 
trolled other people's money, would generally be man- 
aged wastefully and negligently ; so that they could not 
compete with the common business partnership. 



THE INDUSTRIAL REVOLUTION. 55 

Between 1760 and 1840 English industries were revo 

lutionized. The cause of this was a remarkable series of 

inventions which affected the cotton and 

Clmnges in 
woolen industries first. The production of the textile 

cotton and woolen goods had long been hin- 
dered by the difficulty of supplying weavers with enough 
yarn. The rude hand loom could weave cloth faster 
than the spinners could produce yarn, a single thread at 
a time, upon the spinning wheel. Between 1764 and 
1780 three inventors, Hargreaves, Arkwright, and 
Crompton, perfected appliances which finally enabled a 
spinner to spin many thousand threads of yarn at once. 
These inventions enabled spinners to produce more yarn 
than the clumsy hand looms could weave into cloth. 
But, in 1785, Cartwright invented a power loom which, 
after undergoing improvements for many years, placed 
appliances for weaving on an equality with the machinery 
for spinning. Meanwhile, James Watt had invented the 
steam engine in 1769. Sixteen years later it began 
slowly to displace water power in running the new spin- 
ning machinery. These inventions first revolutionized 
the manufacture of cotton, but during the first quarter of 
the present century all textile industries were affected 
by them. 

The steam engine was first used in coal mines, in sink- 
ing shafts, in pumping water out of the mines, and in 

hoisting; coal from the pit. In this way 

° , ^ •' Changes in 

sufficient supplies of coal could be obtained the iron 

to run the smelting furnaces, and the iron 

mdustry was stimulated into new life. By the use of the 



56 ECONOMIC HISTORY OF THE UNITED STATES. 

steam engine the blast furnace was greatly improved, so 
that the production of iron increased rapidly. 

From 1755 to 1800 many canals were constructed 
between important places, with the result of cheapening 
Changes in transportation. Early in the present cen- 
transportation. J5^jj.y the highways of England were greatly 
improved. During the second quarter of the century 
railroad construction was commenced, and the steam 
engine revolutionized land transportation. By 1850 it 
had been applied successfully to ocean transportation. 

One result of the Industrial Revolution was the growth 
of the factory system. The new machinery was far more 
expensive than the old hand loom or spin- 
the factory ning wheel. Consequently the ownership of 
sysem. capital tended to pass out of the hands of 

the laborers, who became dependent upon capitalist 
employers for the supplies of tools and materials with 
which they worked. Then it appeared that, in order to 
apply water or steam power advantageously in operating 
the new machinery, it was necessary to concentrate a 
number of machines in the same building. Moreover, as 
the product of an establishment increased, the processes 
of manufacture could be divided more profitably among 
different classes of laborers. This fact necessitated 
more thorough superintendence and organization. Such 
causes led to the gradual concentration of industry in 
large factories, and to the disappearance of the small 
establishments of the domestic producers. 

In a period of such rapid growth and change, the old 
restrictions on the establishment of industries and the 



THE INDUSTRIAL REVOLUTION. 57 

regulation of prices and wages could not be maintained. 
More and more these laws and customs fell changed 
into disuse, and capitalists and laborers were labor and 
left free to establish new enterprises, and to *^^p^^^- 
arrange their respective interests by a contract which 
was nominally free. Competition became the ruling 
economic force, and regulation by law was given up for 
the time. One of the most important results of the In- 
dustrial Revolution was the destruction of mediaeval 
restrictions upon competition, and the abandonment of 
prices and wages to determination by the contracts of the 
competing parties. 

§ 36. In 1T89 agriculture and commerce were the 
principal industries of the United States, although do- 
mestic manufactures had been established. The industrial 
There appeared here and there a desire to ^^^e^idted 
promote the rapid growth of manufactures, states, 
in order that the country need not depend upon England 
for manufactured goods. Largely from a desire for what 
was termed " industrial independence," attempts were 
made to foster manufactures. In this effort a great 
obstacle was encountered. England possessed the in- 
ventions that were revolutionizing industry, while with- 
out such appliances it would have been hopeless for 
Americans to attempt to compete with the manufac- 
turers of the mother country. But England intended 
to retain the United States as a market for her manu- 
factured products, and did not intend to allow the new 
inventions to be used outside of her own borders. Strin- 
gent laws prohibited the exportation of machines, plans, 



58 ECONOMIC HISTORY OF THE UNITED STATES. 

or models of machinery ; and the emigration of skilled 
workmen was forbidden. After unsuccessful attempts 
to secure a knowledge of English machinery and meth- 
ods, a cotton mill was finally equipped in 1790, at 
Pawtucket, R. I. A few years later the cotton gin was 
invented. Yet the cotton industry grew very slowly until 
after 1807, when foreign commerce was forbidden by the 
embargo, and domestic manufactures rapidly developed. 
Slater's cotton mill at Pawtucket marked the estab- 
lishment of the factory system in the United States. 
Yet weavinof was still performed by hand, 

Tlie completed ° ^ j ^ 

factory sys- and weaving and spinning were not united 
*®"^* in a single factory. In 1814 Mr. Francis 

Lowell constructed a power loom at Waltham, Mass., 
and completed a factory equipped with machinery for 
spinning and weaving cotton. This marked the com- 
pletion of the factory system. Before long other indus- 
tries were developed in a similar manner, and American 
manufactures commenced a period of steady growth. 

III. Transportation. 

§ 37. The first roads in the colonies had to be cut 
through the dense forests that covered the Atlantic 
Roads. coast regions. Indian trails offered more 

or less beaten ways that were often widened and 
straightened into highways. Continuous roads finally 
connected the principal towns of the tidewater districts, 
but wagon roads did not exist far from the seacoast 
until after 1750. Bridges were constructed very slowly, 
and most rivers had to be forded. The larger streams 



TRANSPORTATION. 59 

were crossed by ferries, which gave very poor, and often 
dangerous, service. The colonial roads were in the 
charge of the local political units, the towns and 
counties. They were constructed only as local needs 
demanded, without reference to any general plan for 
colonial highways. The " road tax " levied by the towns 
or counties was paid in labor, not in money ; and the 
work of road building was very badly done. Both this 
custom of "working out the road tax," and the bad 
roads produced by it, remain in many country districts 
to this day. About 1790 turnpike roads, or highways 
constructed and maintained by tolls, began to be built. 
Early in the present century the turnpike systems were 
rapidly extended. These roads were built by corpora- 
tions which were given rights of way, and allowed to 
charge tolls. They were advantageous in a time when 
the local governments could not be induced to build ade- 
quate highways, but grave abuses soon appeared. The 
tolls were often excessive and the roads were poor. In 
more recent times the tendency has been to bring all 
roads under public control, and to provide for highways 
by general taxation. Stili more recently some of the 
state governments have begun to aid in the very neces- 
sary work of improving our roads, which are the worst 
to be found in any civilized country. 

Early in this century, after settlements had been 
planted west of the Alleffhanies, it became „ , 

^ ^ ' Road building 

very necessary to have some means of com- by the united 
munication between the seaboard and the 
Mississippi Valley. There arose a strong movement in 



60 ECONOMIC HISTORY OF THE UNITED STATES. 

favor of the construction of long-distance highways, 
canals, and other improvements by the national govern- 
ment. Between 1806 and 1837 the United States built 
a highway known as the Cumberland Road, which ex- 
tended from Washington to Cumberland, and thence by 
way of Wheeling, through Ohio, Indiana, and Illinois, to 
the Mississippi River near St. Louis. By 1840, a grow- 
ing opposition to internal improvements by the national 
government put an end to such expenditures by the 
United States. 

§ 38. The original colonies were favored with easy 
means of intercolonial communication by sea, while a 
Transporta- i^umber of navigable rivers gave access to 
tion by water, the interior regions of the seaboard. Lines 
of packet sloops were established along the seacoast 
and on the Delaware and Hudson rivers. After 1807 
steamboats were placed upon many of these routes. A 
few years later they appeared upon the Great Lakes. 
On the rivers of the Mississippi Valley, steam navigation 
was exceedingly important. From 1815 to 1860, steam- 
ships multiplied on all these waters. They fui-nished an 
easy means of access to all parts of this region, and 
greatly hastened the development of the Valley. After 
1860 the railroads began to secure a large part of this 
carrying trade. On the Great Lakes the steamboat has 
held its own, and to-day the lake fleet comprises more 
than one fourth of our entire merchant marine. 

Washington, when a young man, perceived the possi- 
bility and desirability of constructing canals connecting 
the Hudson River and the Great Lakes, and connecting 



TRANSPORTATION. 61 

Chesapeake Bay with the Ohio River. Between 1790 

and 1800 many canals were projected, and a few were 

built. The era of canal construction really 

Canals, 
commenced after 1820. The Erie Canal 

was opened from the Hudson River to Lake Erie in 
1825, and soon cheapened transportation from the Ohio 
Valley to the seaboard so that rates fell to one tenth of 
the former cost. Branches were built, and towns and 
cities sprang up wherever the canal met a branch or a 
natural watercourse. Before long other canals were 
built between the Ohio River and Lake Erie, between 
the Hudson and Lake Champlain, and between the coal 
regions of northeastern Pennsylvania and the seacoast. 
Many states entered upon the construction of elaborate 
canal systems. Pennsylvania, Virginia, Indiana, and 
Illinois were among the number. Generally these canals 
proved unsuccessful, and were either abandoned or fell 
into the hands of railroads. Indeed, railroads made 
their appearance very soon after the canals were opened. 
In many cases the canals could not compete with the 
railroads ; but other canals, notably the Erie, proved to 
be successful competitors, and have tended permanently 
to lower transportation charges. 

§ 39. Qj 1830 the era of railway transportation was 
opened by the completion of the first few miles of the 
Baltimore and Ohio Railroad. Shortly after, Railroad 
railroads were built from Boston to Albany, transportation, 
from Richmond to Chesterfield, from Albany to Sara- 
toga, and from Charleston to Hamburg. By 1840 there 
were 2,755 miles of railways in the United States. 



62 ECONOMIC HISTORY OF THE UNITED STATES. 

Practically all were in the Atlantic States, and they 
were short, independent lines, radiating from Boston, 
Albany, New York, Philadelphia, Baltimore, Richmond, 
and Charleston. They were local roads, yet they fur- 
nished an almost continuous line of transportation from 
New York to North Carolina.^ 

Between 1840 and 1850, railroads were extended very 
rapidly in New England, where 2,600 miles of track 

were in operation the latter year. A road 
Second decade' ^ '' 

ofrauroad was completed from Boston to Albany, so 
that New England was placed in direct com- 
munication with the West, via the Erie Canal. By 
1850, railroads had been pushed well into the western 
portions of New York, Pennsylvania, and Maryland. 
Georgia had started a railway system, while roads were 
being constructed in the Mississippi Yalley. As yet no 
lines of railway connected the seaboard with the West, 
while the roads still remained local companies serving 
local needs. 

From 1850 to 1860 the railway mileage of the United 
States increased from 8,571 to 28,919 miles. The Mid- 
The third ^^^ Atlantic States rapidly pushed their rail- 
decade, ^ays westward. In the Southern States 
remarkable progress was made. But in the Mississippi 
Yalley railroad expansion was most noteworthy. Chi- 
cago and St. Louis were finally connected with the 
Atlantic coast, while the states north of the Ohio and 
east of the Mississippi were covered with a network of 

1 See Scribner's Statistical Atlas for maps showing railroad construe^ 
tion by decades. 



TRANSPORTATION. 63 

railways. Twenty-seven million acres of public lands 
had been granted by Congress to aid the construction of 
railroads in the West and South. The people looked 
upon the roads in a friendly manner ; and states, coun- 
ties, and towns granted large sums of money to further 
their construction. 

The Civil War checked railroad building only tem- 
porarily. After 1866 it was continued on a larger scale 
than ever. For political reasons the United ^^^ f^^y^ 
States favored the construction of railroads decade, 
to connect the Pacific coast with the rest of the Union, 
and granted millions of dollars and millions of acres of 
land to aid the Union and Central Pacific roads. Then 
in the Southwest and Northwest land grants and sub- 
sidies to railways were renewed. 

In 1873 the country had 68,484 miles of railroads. 
Since that time many thousand miles of road have been 
built in the states west of the Mississippi, „ „ ^ 

^ ^ Railroad con- 

and other lines have been pushed through to stmction from 
the Pacific coast. In 1905 there were over 
217,000 miles of railroads in the country. During 
the last thirty-five years, railways have often been con- 
structed as speculative enterprises far in advance of the 
needs of the country. Sometimes the construction of 
such a road leads to the rapid development of the region 
through which it runs, and so creates a paying business. 
But such enterprises often lead to the building of un- 
necessary lines that can have no immediate prospect of 
becoming paying investments. 

The character of American railways has changed 



64 ECONOMIC HISTORY OF THE UNITED STATES. 

greatly since 1850. The early roads were short, local 
Railroad con- affairs. Between 1850 and 1860 local roads 
soudation. began to be consolidated into through lines. 
Thus the numerous local roads that together covered 
the distance from Albany to Buffalo were consolidated 
by Yanderbilt into the New York Central Railroad. 
About the same time the Pennsylvania Railroad secured 
a through line from Philadelphia to Pittsburg, and the 
Baltimore and Ohio pushed its way westward. Then 
followed efforts to secure control of roads that should 
give access to Chicago and other points in the Missis- 
sippi Valley. At length, five trunk lines were formed, 
controlling through routes from the West to the sea- 
board. In all directions a similar process went on. The 
reason for such consolidation was that the union of 
several short lines under one management diminished 
the expenses of operation. 

The establishment of trunk lines introduced a new 
era of railroad rate-making. The old local roads had 
enjoyed a practical monopoly in their several districts. 
Competition existed only at a few points where com- 
peting roads met. But the trunk lines could compete 
with each other for the through freight between the 
West and the East, and the sharpest rivalry sprung up. 
The economies of operation made possible by consolida- 
tion enabled the trunk lines to reduce their charges, 
while competition for through traffic obliged them to do 
so. Competition finally became so fierce as to lead to 
" railroad wars," in which rates were often lowered be- 
low the cost of transportation. Such " cut-throat com- 



SHIP BUILDING. 65 

petition" was followed by pooling agreements between 
the different roads, by which rates were maintained at a 
higher level, and the profits thus secured were divided 
between the roads composing the pool. In 1887 Congress 
prohibited the formation of pools, and endeavored by 
an Inter-State Commerce Act to remedy certain abuses. 
But the roads have frequently succeeded in maintaining 
rates by traffic agreements of a more or less secret char- 
acter. The consolidation of railroads did not end with 
the establishment of through lines east of Chicago. 
West of that city the work of consolidation has ex- 
tended to the Missouri River, and from the Missouri to 
the Pacific. Between St. Louis and the Southwest the 
same process has gone on. In 1890 it was estimated 
that one eighth of the railway mileage of the country 
was under a single management, while over one half of 
the railroads had fallen under the control of twenty 
other managements. The prospect is that a few great 
trans-continental lines will finally control all the trans- 
portation business of the country, except that which is 
of a purely local character. 

IV. Ship Building. 

§ 40. The forests of the New World supplied abun- 
dant materials for ship building, which was begun in the 
first years of the colonial history. Massachu- colonial ship 
setts had built one hundred and twenty ves- ^^^^^s- 
sels as early as 1655. By 1700, many ships were built 
each year in New York, Pennsylvania, and Delaware. 
In the southern colonies less was accomplished until the 



66 ECONOMIC HISTORY OF THE UNITED STATES. 

middle of the eighteenth century, when ship building 
developed rapidly in all of the colonies. In the year 
1769 over three hundred and eighty vessels, with a total 
burden of 20,000 tons, were constructed in America. 
Between 1780 and 1800, wooden vessels were built upon 
some of the Great Lakes. Ship building was the first 
mechanical industry to be largely developed in the colo- 
nies, and it made possible the growth of a large and 
profitable commerce. 

§ 41. In 1789 the tonnage of the ships registered 
in the foreign trade was 123,893 tons. For the next 

twenty-five vears Europe was in a state 
American ^ . / 

shipping from of contmual war, and American ships se- 

IY89 to 1840. Q^YQ^ ^ large part of the carrying trade of 
Europe. By 1806, the ships registered in foreign trade 
had a tonnage of 795,507 tons. In the same year the 
ships in the coasting trade had a tonnage of 340,540 
tons, while the sea fisheries employed ships with a ton- 
nage of over 69,000 tons. The United States, in 1790 
and 1792, levied discriminating taxes upon foreign ships, 
with the possible result of throwing more of our com- 
merce into the bauds of American ship owners. After 
1816 the restoration of peace in Europe caused us to 
lose a part of the carrying trade of European countries. 
In 1840 our foreign trade employed no larger tonnage 
than in 1806, but our coasting trade employed ships with 
a tonnage of 1,176,000 tons. Between 1817 and 1820 
our navigation laws were extended, and made especially 
severe against foreign ships. The reason for such illib- 
eral measures was the resentment aroused by the harsh 



SHIP BUILDING. 67 

policy pursued by England until 1830. The laws en* 
acted by Congress at that date are mainly unchanged at 
the present day. They aim to prevent Americans from 
purchasing foreign ships and entering them under Amer- 
ican registry. They exclude foreign vessels from our 
coasting trade, and impose discriminating charges upon 
foreign ships. Many of these regulations prove hin- 
drances to American interests, while they have not bene- 
fited American ship builders materially. 

§ 42. From 1840 to 1861 the tonnage of the vessels 
registered in the foreign trade increased from 762,838 
to 2,496,894 tons, while the tonnage of the ^. 

' ' ' ^ Ship building: 

coasting fleet increased to 2,704,544 tons, from i84o to 

I86I 

During this period seventy per cent of our 
foreign commerce was carried in American vessels, while 
our ships did a large part of the carrying trade of the 
world. In producing wooden sailing vessels American 
ship builders were unequaled, and their magnificent clip- 
per ships were superior to all others. This was ac- 
complished, moreover, when wages and the cost of all 
materials except wood were much higher than in other 
countries. But, after 1850, steamships began to replace 
sailing vessels in ocean commerce. In the construction 
of steamships the United States was soon outstripped by 
Great Britain. The Civil War struck a terrible blow to 
American shipping interests, and our merchant marine 
rapidly diminished. 

§ 43. Since the war our foreign marine has also con- 
stantly declined, although the ships engaged in the coast- 
ing trade have increased. On the Great Lakes there has 



68 ECONOMIC HISTORY OF THE UNITED STATES. 

been wonderful progress. The foreign merchant marine 
of the United States diminished from 2,496,000 tons in 
1861 to 943,000 tons in 1905. . At the same time, the 
proportion of our foreign trade carried in American ships 
decreased from 75 per cent in 1855 to 12.1 per cent in 
Causes for tiie 1905. The causes of this decline are par- 
decune of our j^iallv in dispute. But it certainly besran a few 

merchant ma- " ^ j r> 

rine. years before the Civil War, so that the rav- 

ages of Confederate privateers only hastened a process 
that had already commenced. One primary cause is the 
fact that iron and steel ships have so largely replaced 
wooden vessels. As early as 1855 it was determined 
that iron ships, although more expensive to construct, 
were in the end more durable and consequently cheaper 
than wooden ships. It also appeared that iron vessels 
better withstand the strain of heavy steam machinery. 
More recently, steel has replaced iron for ship construc- 
tion. Now, American builders had a great advantage in 
the cheapness of their wood supply, as well as in their 
skill in constructing wooden vessels. Iron ships, how- 
ever, could be built more cheaply in England ; and there- 
fore the ocean- carrying trade passed to ships of English 
construction. More than this, American builders were 
handicapped by the fact that they were very sl^w in turn- 
ing from sailing vessels to the construction of steam- 
ships. So long as steel vessels retain their present 
superiority, American ship builders will not regain their 
former position until they are able to construct steel 
vessels as cheaply as the builders of foreign nations. 
In recent years the outlook has improved. The creation 



TEXTILE INDUSTRIES. 69 

of our new navy has stimulated the construction of steel 
vessels, while the cost of building them has greatly de- 
creased. The expense for labor is the principal item of 
cost that is larger here than in England, but this dis- 
parity seems to be diminishing. Unquestionably, the 
steel ships now constructed in this country are unex- 
celled in any particular by ships manufactured in any 
country of the world. 

Y. The Textile Industries. 

§ 44. Spinning machinery was introduced into the 

cotton industry in 1790, but nearly twenty years passed 

before as much was accomplished in the _ 

^ The cotton 

woolen industry. The period of commercial and woolen 
restriction following the embargo in 1807 
practically shut off foreign supplies. This caused a 
rapid development of woolen and cotton manufactures. 
Many of the mills built at this time, however, were badly 
constructed and equipped, so that they turned out a very 
coarse product. Between 1815 and 1825 the power loom 
was introduced into this country. Large factory towns 
grew up in such places as Lowell, Lawrence, Fall River, 
Cohoes, and Patterson. 

§ 45. Since 1820 the growth of cotton manufactures 
has been continuous. The industry has been concen- 
trated largely in New England from the be- 

T . _. ^ _ , . The cotton 

gmnmg. In 1905 about sixty per cent of the industry 
cotton spindles were located in that section, ^^^^^^o. 
Massachusetts having the largest number. Since 1870 
there has been a marked development of cotton manu- 



70 ECONOMIC HISTORY OF THE UNITED STATES. 

facture in the South. The capital so invested increased 
from $17,375,000 in 1880 to $230,240,000 in 1905. Since 
these factories can obtain raw cotton without incurring 
any considerable expense for cost of transportation, it 
seems probable that the future development of this 
industry in the South will be rapid. The following table 
shows the rapid growth of cotton manufactures in the 
United States: — 





1840. 


1880. 


1905. 


Value of product 

Pounds of raw cotton ) 
consumed \ 

Number of spindles in ) 
factories ) 

Capital invested 


$46,350,000 
126,000,000 

2,284,000 
$51,102,000 


$192,090,000 
750,343,000 

10,653,000 

$208,280,000 


$442,451,000 
1,873,074,000 

23,155,000 
605,100,000 



The cotton manufacture in the United States has been 
conducted hitherto mainly for supplying the domestic 
market. In the Tenth Census, Mr. Atkinson summed 
up the situation as follows : " The principal 
market for our own fabrics is found among 
the thrifty working people, who constitute 
the great mass of our population. It has 
therefore happened that, although we have not until re- 
cently undertaken the manufacture of very fine fabrics, 
the average quality of the fabrics that we do make is 
better than that of any other nation, with the possible 
exception of France. It is for the wants of the million 



Present con- 
dition of 
tbe cotton 
indnstiy. 



TEXTILE INDUSTRIES. It 

that our cotton factories are mainly worked, and we 
have ceased to import staple goods, and shall never be 
likely to resume their import. On the other hand, we 
may for a long period continue to import the finer goods 
that depend mainly on fashion and style for their use, 
and that are purely articles of luxury." Yet in 1906 
we exported over 152,944,000 of cotton manufactures, 
while imports of this sort amounted to $63,043,000. 
In the future it is probable that the United States, hav- 
ing the advantage of immediate proximity to the great 
source of the world's supply of raw cotton, will surpass 
other countries not similarly situated. 

§ 46. The manufacture of woolen fabrics did not de- 
velop as rapidly as the manufacture of cotton. One 
reason for this was that the domestic supply xhe woolen 
of wool has never been sufficient, while of ^^idustry. 
cotton this country has possessed a cheap and abundant 
supply. Moreover, tariff duties often imposed on 
imported wool have for much of the time increased 
the cost of raw materials to the manufacturer. The 
woolen manufactures that sprung up during the War 
of 1812 suffered considerable reverses after 1815, but 
by 1828 the industry seemed to have surmounted what- 
ever initial difficulties there may have been in the way 
of its development. 

The statistical table on page 72 shows the growth of 
woolen manufactures in the United States since 1860. 

It is interesting to study the location of the woolen 
industry in the United States. At the opening of the 
present century it was, like all domestic industries, 



72 ECONOMIC HISTORY OF THE UNITED STATES. 



Articles. 


1860. 


1880. 


1890. 


1905. 


Woolen Goods : 

1. Capital 

2. Product 


$30,862,000 
61,894,000 


$96,095,000 
160,606,000 


1130,989,000 
133,577,000 


$140,302,000 
142,196,000 


Worsted Goods : 

1. Capital 

2. Product 


3,230,000 
3,701,000 


20,874,000 
33,549,000 


68,085,000 
79,194,000 


162,464,000 
165,745,000 


Carpets : 

1. Capital 

2. Product 


4,721,000 
7,857,000 


21,468,000 
31,792,000 


88,208,000 
47,770,000 


56,781,000 
61,586,000 


Felt Goods ; 

1. Capital 

2. Product 


.... 


1,958,000 
3,619,000 


4,460,000 
4,654,000 


9,667,000 
8,948,000 


Wool Plats : 

1. Capital 

2. Product 


.... 


3,615,000 
8,516,000 


4,142,000 
5,329,000 


1,646,000 
2,457,000 


Hosiery and 
Knit Goods r 

1. Capital 

2. Product 


4,085,000 

7,280,000 


15,579,000 
29,167,000 


50,607,000 
67,241,000 


106,668,000 
136,558,000 


Total : 

1. Capital 

2. Product 


42,848,000 
80,782,000 


159,089,000 
267,249,000 


296,491,000 
337,765,000 


477,523,000 
517,490,000 



widely diffused throughout the country. With the rise 
of the factory system, it became more concentrated 
either near the sources of the domestic wool supply, 
or by available water powers. Gradually, however, the 
manufacture has become concentrated near the markets 
where both foreign and domestic wools are more easily 
gathered, and in the vicinity of labor markets where 
skilled textile operatives are to be found. Eight cities, 
Philadelphia, Lawrence, Providence, and Lowell being 
the most important, now turn out nearly thirty-six per 



TEXTILE INDUSTRIES. 



73 



cent of the woolen product of the country. New Eng- 
land, New York, New Jersey, and Pennsylvania possess 
more than eighty-five per cent of the woolen machinery. 
Of these, Pennsylvania leads, Massachusetts holding 
second place. At the present time the woolen goods 
produced in the United States are sufficient to supply 
eighty -nine per cent of the domestic demand. In 1906 
imports of woolen goods amounted to $23,080,000, 
while the exports were valued at $2,119,000. 

§ 47. A complete account of the textile industries of 
the United States should include some mention of the 
silk manufacture and of establishments de- combined tex- 
voted to dyeing and finishing textile prod- tile industries, 
ucts. The product of silk fabrics has increased from 
11,809,000 in 1850 to $133,288,000 in 1905 ; while the 
product of the dyeing and finishing industries in 1905 
was $50,849,000. The imports of silk manufactures in 
1906 amounted to $32,910,000, and the exports of such 
goods were insignificant. The following table shows 
how the textile industries of the United States are 
concentrated in the same states : — 



Locality. 


Woolen Product, 
1900. 


Cotton, 1900. 


Silk, 1900. 


Massachusetts 


$81,041,000 


$111,125,000 


$5,957,000 


Pennsylvania 


71,878,000 


25,447,000 


31,072,000 


New York 


30,813,000 


10,788,000 


12,706,000 


Ehode Island 


38,671,000 


26,435,000 


1,311,000 


New Jersey 


13,793,000 


6,930,000 


39,960,000 


Connecticut 


12,637,000 


15,500,000 


12,378,000 


New Hampshire 


7,624,000 


22,998,000 




Maine 


13,412,000 


14,631,000 





74 ECONOMIC HISTORY OF THE UNITED STATES. 

VI. Iron and Steel Industries. 

§ 48. The Industrial Revolution began an era of 
machine production, and caused a new demand for 
iron as the material needed for machine 
dustryfrom construction. Therefore iron occupies a 
1789 to I860. pQgj|.JQjj Qf peculiar importance at the pres- 
ent day. The development of other industries neces- 
sarily increases the demand for iron, while a depression 
in business causes the demand to slacken. Many years 
passed before the revolution in English methods of pro- 
ducing iron affected the industry in the United States. 
Until nearly 1840 iron continued to be smelted by char- 
coal, with methods that differed little from those of 
colonial times. Pennsylvania already produced one half 
of the iron smelted in this country, and Pittsburg was 
becoming the center of the iron industry in western 
Pennsylvania. About 1840 anthracite coal was used in 
smelting, and the blast furnaces began to be improved. 
The industry was then placed on a modern basis, and 
the product increased from 200,000 tons of pig iron in 
1830 to over 900,000 tons in 1860. In 1850 coke began 
to be used in smelting, and some years later uncoked 
bituminous coal was employed. Gradually the produc- 
tion of pig iron was concentrated in the vicinity of the 
coal supplies, since it was cheaper to carry iron to the 
coal regions than to carry coal to the iron mines. Thus 
most of the iron produced in Michigan has been smelted 
in other states where coal is more abundant. By 1856 
the iron and coal resources of the United States had 
been developed so far that Mr. Abram S. Hewitt could 



IRON AND STEEL. 



75 



wrrite, " In point of fact the materials for making a ton 
of iron can be laid down in the United States at the 
furnace with less expenditure of human labor than in 
any part of the known world, with the possible excep- 
tion of Scotland." Ten years later the English econo- 
mist Jevons wrote, "It is impossible there should be 
two opinions as to the future ^eat of the iron trade. 
The abundance and purity of both fuel and ore in the 
United States, with the commercial enterprise of Ameri- 
can manufacturers, put the question beyond doubt." 

§ 49. Yet the iron resources of the country had 
hardly begun to be developed in 1860. The increase 
in the product of pig iron during the thirty years from 
1860 to 1905 is shown herewith : — 



Year. 


Product in Tons. 


Value. 


1860 
1870 
1880 
1890 
1900 
1905 


987,559 

2,052,821 

3,781,021 

9,906,607 

13,789,000 

22,992,000 


$20,870,000 
69,640,000 
89,815,000 
145,643,000 
259,944,000 
382,450,000 



Of this product Pennsylvania has produced nearly 

one half, — Ohio, Illinois, and Alabama coming next in 

importance. In 1860 the steel product of 

^ Iron and steel 

the United States was very small, amount- industries 

ing to only 11,838 tons, valued at $1,778,240. ^^^ '"°- 
In 1867 steel was made by the newly introduced Besse- 
mer and open-hearth processes, and the industry has 
ever since shown a constantly increasing product. In 
1905 the rolling mills and steel works turned out 
20,023,000 tons of steel. The Census of 1880 showed 



76 ECONOMIC HISTORY OF THE UNITED STATES. 

the United States to be " the second iron-making and 

steel-making country in the world." Since that time it 

has surpassed England in this respect. 

§ 50. Many kinds of manufactures of iron and steel 

have been established in this country for a long time. 

« ^ . The manufacture of wroua'ht-iron nails, of 
Manufactures ° ' 

of iron the simpler kinds of tools and cutlery, and 

of firearms are some of the older branches 
of this industry. Yet up to 1860 the American market 
was largely supplied by foreign producers of iron and 
steel manufactures. The exports of such commodi- 
ties never exceeded 11,000,000 until after 1840, and 
amounted to only 110,000,000 in 1865. During the 
last fifty years, however, remarkable progress has been 
made in the American manufacture of iron and steel. 
Wire and cut nails, iron and steel pipes, cutlery, tools 
and machinery of all kinds, stationary and locomotive 
engines, arms and armor plate, steel rails, and many 
other products of iron and steel are now turned out in 
quantity sufficient to supply the greater part of the do- 
mestic demand and to leave a surplus for export. In 
1906 the iron and steel products exported from the 
United States amounted to 1160,984,000, while the im- 
ports of such commodities were slightly more than 
129,053,000. One important feature of this kind of 
American manufacture has been the early and exten- 
sive use of interchangeable mechanism. Firearms, ; 
sewing machines, locomotive engines, watches, clocks, 
agricultural implements, and many other products have 
been constructed with interchangeable parts ; and in 
this field American manufacturers have won celebrity. 



I 



LITERATURE, 77 



LITEKATUKE ON CHAPTER III. 

On Colonial Manufactures : Weeden, Economic and Social 
History of New England ; Bruce, Economic History of Virginia ; 
Eighty Years' Progress, 11. ; Beer, Commercial Policy of Eng- 
land toward the American Colonies ; Taussig, State Papers and 
Speeches on the Tariff, 1-107 ; Swank, History of the Manufac- 
ture of Iron ; Bishop, History of American Manufactures ; Wright, 
Industrial Evolntion of the United States, 23-103. 

On the "Industrial Revolution": Toynbee, The Industrial 
Revolution ; Gibbins, The Industrial History of England, 143-224 ; 
Cunningham, Outlines of English Industrial History ; Cunning- 
ham, Growth of English Industry and Commerce, II. ; Rogers, 
Six Centuries of Work and Wages ; Hobson, Evolution of Modern 
Capitalism, 10-116 ; Ely, Outlines of Economics, 26-62; Wright, 
Industrial Evolution of the United States ; Wright, The Factory 
System of the United States, Tenth Census, II. .529-610 ; Taylor, 
History of the Factory System; Rand, Selections Illustrating 
Economic History since 1763; Taussig, Tariff History of the 
United States, 1-67. 

On Transportation: Eighty Years' Progress, II.; Weeden, 
Economic and Social History of New England ; Bolles. Indus- 
trial History of the United States, 603-664 ; McMaster, History 
of the People of the United States ; Jenks, Road Legislation for 
the American State; Shaler, American Highways; Johnson's 
Universal Cyclopsedia, " Transportation ; " Tenth Census, IV. ; 
Eleventh Census, Report on Transportation Business; Scribner's 
Statistical Atlas ; Shaler, The United States, 11.65-190; Had- 
ley. Railroad Transportation; Poor's Railroad Manual, 1881. 

On Ship Building : Wright, The Industrial Evolution of the 
United States, 29-42 ; Bolles, Industrial History of the United 
States, 569-602; Tenth Census, VIIL; Wells, Our Merchant 
Marine; Bates, The American Marine; Shaler, The United 
States, I. 518-624. 

On the Textile Industries : Eighty Years' Progress, II. ; 
Wright, Industrial Evolution of the United States, 132-188 ; 
Taussig, Tariff History of the United States ; Bishop, History 



78 Economic hisiory of the united states. 

of American Manufactures; Bolles, Industrial History of the 
United States, 369-443 ; Tenth Census, II. ; Eleventh Census, 
Reports on Textile Industries. 

On the Iron and Steel Industries: Swank, History of the 
Manufacture of Iron ; Bishop, History of American Manufactures ; 
Eighty Years' Progress, II.; Bolles, Industrial History of the 
United States, 185-315; Wright, Industrial Evolution of the 
United States ; Taussig, TarifE History of the United States ; 
Tenth Census, II. 729-935 ; Eleventh Census, Report on Manufac- 
' turing Industries, III. 



HUMAN WANTS, 79 



CHAPTER IV. 

• THE CONSUMPTION OF WEALTH. 
I. Human Wants. 

§ 51. The preceding chapters have explained briefly 
the history of the leading industries by which the 
people of America have endeavored, for Definition 
nearly three centuries, to supply their wants ^^ economics, 
for food, shelter, clothing, and all those commodities 
that are needed to support life, and to make civilized 
existence possible. The science of economics treats of 
precisely these efforts of mankind to secure certain 
material objects, or certain services of other people. 
It deals, in short, with those activities of man which 
are directed toward securing a living. The reason why 
men carry on these activities is that they have certain 
needs or wants which can be appeased only by appro- 
priate human action. Therefore, human needs may well 
be made the starting point of economic studies ; and 
our first work will be to examine into the character of 
the wants that impel men to constant efforts to secure 
a living for themselves and their families. 

§ 52. Man has a material body which demands cer- 
tain objects necessary for its preservation and develop- 



80 PRINCIPLES OF ECONOMICS. 

ment. From this source arise certain bodily wants, some 
of which man shares in common with other animals. The 
Origin of hu- i^Gcds for food, drink, clothing, and shelter 
man wants, f^j. one's self and one's family are the prin- 
cipal bodily wants of this character. Beyond this point 
the wants of the lower animals hardly extend ; but man, 
endowed with superior faculties and a higher spiritual 
nature, has developed a multitude of higher needs. 
Some of these are of a spiritual character, as the desire 
for companionship, for intellectual or religious develop- 
ment, and the like. But others are of a material nature. 
As men become more intelligent and refined, they grow 
dissatisfied with the ruder and coarser forms of food, 
clothing, and shelter. They demand more varied and 
palatable food, finer clothing, more beautiful houses. 
Their aesthetic faculties transform the demands of their 
animal natures, and infuse a spiritual element into what 
were formerly simple material desires for food, clothes, 
and shelter. A dining table artistically arranged, a 
beautiful dress, or a finely designed house will serve as 
examples of material goods that satisfy animal wants 
which have been partially transformed by the de- 
mands of man's aesthetic faculties. Moreover, it must 
be noticed that many spiritual wants can be satisfied 
only through the medium of material objects. Thus a 
printed book is often the only means by which knowl- 
edge can be communicated from one mind to another. 
Finally, many of man's higher needs have a distinctly 
social character. One of the strongest human wants 
is the desire for the society of one's fellows. Out of 



HUMAN WANTS. 81 

this desire of men to live together in an organized 
society, there arise many social wants of an economic 
character which are oftentimes satisfied by collective 
or social action. Roads, bridges, sewers, schools, asy- 
lums, parks, postal facilities, and many other economic 
goods are the result of social action, and minister to 
social or public needs. 

§ 53. In the development of human wants a certain 
order can be observed. In the lowest stages of barba- 
rism, men are found to be almost devoid of Development 
any but the animal needs and desires. They °* wants, 
can advance in civilization only as fast as their higher 
faculties can be developed, and higher wants aroused 
within them. The principal difficulty in efforts to civi- 
lize a savage race is to make such people desire any- 
thing more than the purely animal satisfactions with 
which they have always been contented. As men ad- 
vance in the scale of civilization, their wants rapidly 
increase in number and variety. We have seen that 
this is due to the development of higher spiritual facul- 
ties. These both arouse within men higher desires, and 
also make it possible to devise means for their gratifica- 
tion. These higher desires, and the power to satisfy 
them, are alike peculiar to man. The food of the horse 
or dog, and the abodes of the birds or the beaver, have 
in all known times remained the same, except as they 
have been modified by human action. The progress of 
the human race from barbarism to civilization has been 
marked first and fundamentally by an increase and a 
diversification of wants. This has been due to the influ- 

6 



82 PRINCIPLES OF ECONOMICS. 

ence of man's spiritual faculties in transforming purely 
animal wants, and in developing multitudes of higher 
desires. 

§ 54. Economics is not directly concerned with all 
the possible wants of man's nature. It studies only 
Classification those wants which impel him to exertion in 
of wants. order to secure a living, in order to procure 
certain material objects,^or certain services of other per- 
sons. In a rough way, therefore, we may classify the 
wants with which economics deals as (1) wants for mate- 
rial objects, and (2) wants for personal services. 

But a further classification of wants will be of use. 

We may divide them into " existence wants " and 

A second " Culture wants." The first class comprises 

classification. ^\\ ^|^g purely animal wants ; the second 

includes all wants for those things which lead to the 

refinement and ennobling of men's lives. 

Many of the wants of man's animal nature are for 
objects necessary to the continued existence of families 
Existence ^^ human beings ; others are for objects of 
wants. relative indifference, so far as the mere 

preservation of life is concerned. The non-satisfaction 
of necessary wants leads to physical pain, disease, or 
death. Hence normal persons will procure the objects 
necessary for such needs before attempting to satisfy 
otlier desires. The demand for such " necessaries of 
life " will, therefore, remain strong and fairly constant 
even if other satisfactions have to be given up. Another 
fact should also be noticed. As fast as the lower exist- 
ence wants are appeased, men often become conscious of 



I 



HUMAN WANTS. 83 

new needs and desires, which they now have an oppor- 
tunity to satisfy. Progress in civilization depends upon 
the awakening of such higher wants. With a progress- 
ive people, therefore, the satisfaction of existence wants 
serves merely to arouse new desires, and to stimulate 
men to attempt to satisfy them. 

The non-satisfaction of culture wants may result in 
a loss of comfort, of pleasure, or of social esteem. 
These wants are largely acquired ; yet the culture 
force of habit may make such desires very wants, 
strong, so that they may seem to have almost the im- 
portance of existence wants. To people in one social 
class, expensive clothes or a private carriage may seem 
a decency 'merely, and a necessity to the maintenance of 
social position or esteem. To other people such objects 
may be luxuries, and may seem to have no connection 
with real personal welfare. These culture wants, there- 
fore, vary greatly according to individual tastes or social 
position. The number and the possible variety of such 
wants are, moreover, really illimitable. Existence wants 
are far less expansive. The absolute amount of nourish- 
ment, of clothing, or of shelter which a person requires 
is limited quite narrowly, and cannot be greatly in- 
creased. But the possible varieties of fine food and 
clothing are very many. When we come to such cul- 
ture wants as the desires for books, pictures, foreign 
travel, and the like, the possible increase in the abso- 
lute number and variety of human wants is practically 
infinite. These wants may be directed toward the 
development of one's faculties and activities, rather 



84 PRINCIPLES OF ECONOMICS. 

than toward the satisfactions of the senses. A thirst 
for knowledge, or the pursuit of literature and art for 
their own sake, may have for their objects the develop- 
ment of faculties, not sensuous gratification. While 
the awakening and the satisfaction of culttire wants 
are both desirable and necessary, if life is to be made ■ 
worth the living, the development of such tastes may take 
undesirable directions. Luxurious desires may be car- 
ried too far ; and the constant increase of wants, even 
of wants desirable in themselves may lead to extrava- 
gance and prodigality. 

II. Economic Goods. I 

§ 55. Everything which satisfies a human want is a" 
utility or a good. The abstract noun " utility " means the 
utilities power to satisfy wants. Economics treats 
or goods. Qf man's efforts to supply himself with cer- 
tain utilities, or goods. These utilities may be either 
material objects or personal services. To such goods 
the term " wealth " is applied. In common usage wealth 
often means great riches, but such is not the sense in 
which the economist uses the word. To him the poor 
man's dwelling and the rich man's palace are alike 
wealth, in that they are both want satisfiers, or utili- 
ties. Our definition of goods and wealth serves to 
make clear one very important point. Nothing can 
be wealth except as it is able to satisfy a human want. 
The conception of goods or wealth, therefore, is purely 
relative to human needs. A change in men's wants 
may render much former wealth valueless, and con- 



ECONOMIC GOODS. 85 

versely. The passing away of the belief in magic made 
charms and relics worthless, while varying fashions in 
dress are constantly producing similar results. 

% ^^. It is necessary now to give a more exact defi- 
nition to the term " economic goods." We have seen that 
economic goods include both material ob- 
jects and personal services, but not all such goj^g. 
objects or services come within the scope 
of the definition. Some goods exist in such supera- 
bundance that men, without making any effort or sac- 
rifice, find all wants for such objects completely satisfied 
Such goods are free to all, no lack of them is ever ex 
perienced, and they are not objects of economic effort 
Air, sunlight, and water are generally examples of such 
free goods. ^ But many other things can be secured only 
by efforFor sacrifice of some sort, for the reason that 
the supply of such utilities is limited. Such limitations 
may be due to the impossibility of increasing the num- 
ber of the goods in existence, as in the case of old 
paintings and antiques ; or to the fact that the supply 
of the commodity in question can be increased only by 
the labor of production. Utilities of which the supply 
is limited, as compared with hunian desires for them, 
are calTeH economic goods. Men never experience any 
lacF^ free goods since all their wants for such objects 
are abundantly supplied. But in the case of economic 
goods, men experience constantly unsatisfied wants 
which they seek in some manner to satisfy. 

Economic goods, since they are limited in supply, 
can be obtained as a rule only by exertion or sacrifice 



86 PRINCIPLES OF ECONOMICS. 

of some sort. For that reason they may usually be 
Transferabii- exchanged for other goods. Material ob- 

ity of econom- jects may be transferred from one person 
ic goods. J ./ 1 

to another. Man's faculties cannot be thus 

transferred, but the services which his faculties enable 
him to render may be exchanged for the services of 
others or for material objects. In so far as the ex- 
change or transfer of personal services forms a part of 
man's economic activities, personal services must be 
regarded as economic goods. 

The utility, or the power which commodities possess 

to satisfy our wants, may arise in any one of four ways. 

The object mav be fitted, as for example 

Elementary, ' • i p 

form, place, pig iron, to serve as the raw material for 
utiUtiS^ some desirable product. Such a commod- 
ity possesses elementary utility. Next, 
after undergoing changes in form, the pig iron may 
become a finished product adapted for man's use ; and 
may then acquire form utility. Again, Avhen trans- 
ported from the forge or rolling mill to the place where 
some consumer may make use of it, the iron product 
acquires a place utility. Finally, some commodities 
may be most desirable only at certain times, as ice in 
summer, and fuel in winter. A good placed before the 
consumer at just the time when it is desired will possess 
a time utility. 

The terms " utility " and " good " as used by the 

economist have nothing to do with the real 

desirability or moral estimate of the object 

in question, or of the want to which it ministers. Cer- 



CONSUMPTION OF WEALTH. 87 

tain wants may be undesirable or harmful in their grati- 
fication ; but if men possess such wants, and demand 
such undesirable objects for consumption, those objects 
assume economic importance and must be considered 
economic goods. 

III. The Consumption of Wealth. 

§ 57. All goods are produced for the purpose of being 
consumed. By consumption the economist means the 
destruction of utilities. This takes place 

The consump- 
when goods are used up by consumers, who tionof 

apply them to the purposes for which they ^^ 

were designed. Utilities may be destroyed also by the 

natural decay of goods, by the action of the elements, as 

in floods or tornadoes, or by wanton waste on the part 

of man. Usually when the term consumption is used, 

we shall refer to the rational destruction of utilities in 

the satisfaction of human wants. 

It is important to note the difference between the 

consumption of durable goods and the consumption of 

perishable commodities. A book, a coat, 

^ , ' ' Durable and 

or a house may yield a large number of perishable 

satisfactions through many acts of repeated ^°° 

use. An article of food is able to yield but a single 

satisfaction in a single act of consumption, and may be 

called a perishable good. The book, the coat, and the 

house may be considered relatively durable goods, which 

are consumed only by a series of acts extending through 

a considerable period of time. Some goods, such as 

land, may be so used that their utility may never be 



88 PRINCIPLES OF ECONOMICS. 

destroyed ; and may, therefore, be considered absolutely 
durable goods. 

The consumption of wealth tends to produce positive 
pleasure or to avert pain. The pleasures produced or 
Consumption ^^^® pains averted may be either present or 
andproduction. pj.Qgpect;ive, but they are the usual results 
of acts of consumption. The production of utilities, 
on the other hand, necessitates, in most cases, some pain 
or hardship. Disagreeable labor must be performed, or 
desired ease be given up, or some sacrifice be incurred. 
In their efforts to satisfy wants, men are constantly 
weighing the probable pleasures of consumption against 
the sacrifices necessary for the production of consumable 
wealth. A man's action is likely to take that direction 
in which he considers that the largest balance or surplus 
of pleasure over pain can be obtained. The older econo- 
mists expressed this by saying that " every man desires 
to obtain additional wealth with as little sacrifice as 
possible." This fact will guide us in our study of the 
consumption of wealth. 

§ 58. Human wants are satiable. If a person con- 
sumes at any given time successive units or portions of a 

commodity, he finds that the later units pro- 
The law of "^ \ . r ,- xi ^i 

diminisMng duce less pleasure or satisfaction than tne 

utility. £^^gj.^ j£ gjjQug];! Qf the commodity is con- 

sumed, a point may finally be reached at which the 
consumption of any more units ceases to produce any 
satisfaction whatever, and may even cause pain. This 
will be seen if we suppose a man to be supplied with 
successive pieces of bread. The first piece might serve 



CONSUMPTION OF WEALTH, 



89 



to appease the pangs of extreme hunger; and would, 
therefore, have a very high degree of utility. The 
second piece might be consumed with great pleasure, 
but it would not have the same intense utility that the 
first possessed. A third piece of bread might completely 
satisfy the man's desire for food at that time, so that a 
fourth piece would have no utility whatever for consump- 
tion at that moment. In this case, then, the second 
piece of bread has a smaller utility than the first, while 
the third has less than the second. After the third 
piece has been consumed, the point of satiety is reached. 

This law is often illustrated by the follow- luustration 
ing diagram : — 



of tlie law 



/ 



1 2 



In this diagram the lines 1 2, 2 3, 3 4, 4 5, etc., represent 
eight units or pieces of bread. The pleasure derived 



90 



PRINCIPLES OF ECONOMICS. 



from the unit first consumed, 1 2, may be infinitely 
great, since this first piece may be necessary to preserve 
life. The second unit, 2 3, has a utility measured by the 
perpendicular line 3 h ; and the parallelogram erected 
upon 2 3 represents the utility of this second unit. Each 
subsequent unit has a smaller degree of utility, repre- 
sented by the several perpendicular lines. The utility of 
the eighth unit, 8 9, is nothing, because it is supposed 
that the point of satiety is reached after seven units are 
consumed. Now if the successive units are made very 
small, the diminishing utility of the commodity may be 
represented by a curved line, as in the following figure : 




Here the. utility of the first unit, o, is infinite; the utility 
of any unit, m, is represented by the perpendicular line, 
'm n ; while the last unit, x^ possesses no utility whatever. 



CONSUMPTION OF WEALTH. 91 

We must now distinguish between total and marginal 
utility. Each unit of the supply, until the point of 
satiety is reached at x. possesses a certain 

•^ ' ^ Total and 

degree of utility represented in our diagram marginal 

by a perpendicular line drawn at the proper ^ 

point. The sum of the utility of all the units is the 

total utility of the entire supply, ox. On the other 

hand, the marginal utility is the utility of that portion 

or unit of the supply which is last consumed. In our 

illustration, x is the marginal unit of the supply, and 

the marginal utility has become zero. If, however, the 

supply should be reduced to o m units, m would be the 

marginal unit ; while the marginal utility would be 

represented by the perpendicular line mn. 

At any given moment it is safe to conclude that if a 
person's supply of any commodity is increased, the 
marginal utility of the commodity will de- j.. . ^ 
crease. But if a considerable period of upon the 
time passes, it is possible that the person's diminishing 
wants may expand, so that a larger supply "^^^* 
at the later period may have as great a marginal utility 
as a smaller supply had at the former period. When 
different times are considered, the law of diminishing 
utility must be used with a great deal of caution. 

§ 59. In supplying their wants men consume com- 
modities in a certain order. In selecting goods for 

consumption two things are considered : 

^ ^ The economic 

-first., the utility of the goods ; and second, order of con- 

L\ 1. -n 1 sximption. 

the cost or sacntice necessary to procure 

^hem. Those commodities will be selected first which 



92 PRINCIPLES OF ECONOMICS. 

yield the largest surplus of enjoyment above the neces- 
sary costs. Suppose bananas and oranges to be offered 
for sale at the same price, say twenty cents a dozen. 
Then a person who prefers bananas to oranges will 
certainly purchase bananas. They liave for him a 
greater utility than oranges ; and, the cost being the 
same, will yield him a greater surplus of utility over 
costs. But now suppose that the person buys six 
bananas. Then it is probable that an additional half- 
dozen would have less utility for his personal consump- 
tion at that time than the first six bananas possessed. 
The diminished marginal utility of the larger supply 
of bananas might leave a smaller surplus of utility 
over costs than could be obtained by buying a half- 
dozen oranges. Hence it is possible that he may buy 
six oranges instead of buying an additional half-dozen of 
bananas. Now let us assume a second case. Suppose 
that the person prefers oranges to bananas ; and suppose 
that an orange costs five cents, while bananas happen to 
be selling for a cent apiece. Under such circumstances, 
it is evident that the greatest surplus of utility over 
cost could be secured by purchasing bananas instead 
of oranges, unless the person's preference for oranges 
should be great enough to overcome the difference of 
four cents in the cost of the two kinds of fruit. Com- 
parisons of this sort lie at the basis of the judgments 
formed by purchasers in a market. 

A second This principle may be illustrated by the 

mustration. foUowino; diagram : — 



CONSUMPTION OF WEALTH, 



93 




2, 9 ^'^468^ 

Commodity 1. — Oranges. Commodity 2. — Bananas. 

In these figures the lines X' and A X represent the 
entire supply of the commodities 1 and 2. The lines 
2, 9, JL 4, J. 6, and A 8 represent various amounts 
of the supply, of which 2, 9, 4, 6, and 8 are respec- 
tively the marginal units. The lines OP, 2 X, 9 iV^, 
AB, 4:R, 6K, and 8 M represent the utility of the 
various units of the supply, 0, 2, 9, A, 4, 6, and 8. 
The curved lines P X^ and B X represent the diminish- 
ing utility to a particular person of the successive por- 
tions of the supply. The lines 0, 2 ^, 9 iV, ^ D, 4 P, 
6 Gr, and 8 M represent the cost or sacrifice necessary 
to secure each unit of the supply .^ Then the lines OP, 
JE L,I> B,FR, and (7 j^ represent the surplus of utility 
over cost in the case of the units 0, 2, A, 4, and 6 

1 For convenience of illustration we will assume the cost of all the 
units to be the same. Then the continuous lines C iV" and Z) J/ represent 
the cost of all units. 



94 PRINCIPLES OF ECONOMICS. 

respectively. Now the person in question will select a 
certain number of units of commodity 2 first of all, 
since the first units of this commodity possess for him 
the larger surplus of utility over cost. He will not pur- 
chase more than A 4 units of this commodity, however, 
before he finds that, beyond the marginal unit 4, ad- 
ditional units would yield a smaller surplus of utility 
over cost than the first units of commodity 1. Simi- 
larly, the person would not buy more than 2 units of 
commodity 1, since, beyond the marginal unit 2, addi- 
tional units would yield a smaller surplus of utility than 
further purchases of commodity 2 would produce. 
Therefore he may choose additional units of 2 until, 
after reaching the unit 6, the surplus of utility over 
costs may be the same for the marginal units (2 and 6) 
of each commodity. How many additional units of 
each commodity the person in question may choose to 
purchase will depend upon the extent to which his 
means enable him to gratify his wants. In any case he 
would not carry his purchases beyond the points of 
supply represented by 9 and ^8. At these points 
the marginal units (9 and 8) yield no surplus of utility 
over sacrifice ; and the person would have no induce- 
ment to make additional exertion in order to secure an 
additional supply of either commodity. 

We may, therefore, lay down these two principles 

concernins; the order in which commod- 
The economic '^ • ^ n 

order of con- ities will be selected for consumption : (1) 
sumption. Those goods will be first procured and con- 
sumed which yield the greatest surplus of utility over 



CONSUMPTION OF WEALTH. 95 

costs. (2) In choosing between different commodities 

each person will endeavor to make the surplus of utility 

obtained from the marginal unit of one commodity equal 

to that obtained from every other marginal unit. 

When the surplus of utility over costs obtained from 

the marginal unit of one commodity becomes less than 

could be obtained from one or more units of a second 

commodity, the second commodity will be purchased in 

preference to the first. 

Every person, in the management of his expenses, is 

constantly making such estimates of the comparative 

utility and the comparative cost of all com- 

Cautioii. 
modities which he purchases. It is seldom, 

however, that judgments can be made with the exact- 
ness presupposed in the diagram above given. We 
should remember, moreover, that different persons place 
very different estimates upon the utility of the same 
commodities. * This makes it very difficult to theorize 
concerning the utility of goods to the general purchasing 
public. We can merely observe what prices other 
people are willing to pay for commodities, and then 
infer from these prices what the utility of the commodi' 
ties is considered to be. 

§ 60. Having already distinguished between total 
utility and marginal utility, we must now notice that 
our estimates of the importance of commodi- ^j^^ importance 

ties for the purpose of consumption always of a good de- 
pends upon its 
depend upon the margmal, not upon the marginal 

total utility. An often quoted illustration ^^^^^ 

will make this clear. A peasant has put aside three 



96 PRINCIPLES OF ECONOMICS. 

sacks of corn which must last him until the next har- 
vest. One sack he will use for food ; a second must be 
kept for seed ; the third is used for feeding poultry, which 
forms a pleasant but not necessary addition to his diet 
What will be the utility of one sack of corn to such a peas- 
ant ? This question can be answered by inquiring what 
the peasant would lose if he should be deprived of one 
sack of his corn. If this should happen, he v/ould not go 
without food, nor would he be likely to sacrifice his seed 
for next year's crop. Probably he would sacrifice the 
poultry, since they represent the least important of the 
three classes of wants to which the three sacks of corn 
minister. It appears, then, that when the peasant's sup- 
ply of corn amounts to three sacks, the real significance 
of a single sack is measured by the importance of the 
weakest want which any one of the three sacks may be 
used to satisfy. 

A little reflection will convince any one that all our 

estimates of utility are based upon the utility of the last, 

or marginal, portion of the supply. The 

Suiiiill&X7> 

units first consumed may have an infinite 
utility. Thus the first portion of food consumed may 
save us from starvation. But when we have a large 
supply of bread, the importance of any single piece sinks 
to the level of the marginal or last piece consumed, 
which ministers to the least intense want which bread 
can satisfy. If our supply of bread should exceed our 
wants, the utility of a single piece would fall to zero. 
Therefore the marginal utility of a commodity, or the 
utility of the marginal unit of the supply of a com- 



I 



CONSUMPTION OF WEALTH. 97 

modity, determines our estimates of the commodity's 
importance for purposes of consumption. In regard to 
total utility it may be well to add that, since the utility 
of the first units of the supply oftentimes is infinite, the 
total utility of many commodities is infinitely great. In 
no cases have we any accurate means of measuring oi 
comparing total utilities. Final utilities we are able to 
estimate, first, by observing the final utility of commodi- 
ties for our own consumption ; and second, by observing 
wliat sacrifices or costs other people are willing to incur 
in order to procure different classes of goods. 

§ 61. Some commodities are in the form of finished 
products ready at hand for consumption ; others are in 
the form of raw materials and goods not 
yet ripe for consumption. From this fact ^ture goods 
arises the distinction between present and 
future goods. This distinction is of importance in the 
theory of consumption. Future pleasures and pains are 
usually undervalued in comparison with present. Goods 
which are available only in the future, or which min- 
ister to future not to present wants, are regularly 
undervalued in comparison with present goods. The 
3um of one hundred dollars obtainable only at some 
future date, may appear less desirable than a sum of 
ninety dollars which is immediately available. In this 
way future goods are usually discounted when compared 
with present satisfactions. This is due, not merely to 
the uncertainty of all future events, but also to the 
fact that all future pleasures and pains, however certain 
they may be, are more lightly regarded than present 



98 PRINCIPLES OF ECONOMICS. 

pleasures and pains. Savage peoples are proverbially 
heedless of the future, and live mainly for the present 
enjoyment In times of plenty they may consume 
gluttonously and wastefully the very food that may be 
essential to the preservation of life at a later time. 
Civilized people are far more provident, and pay far 
more heed to future needs. Nevertheless, the tendency 
to underestimate the future still remains. 

§ 62. It is well to distinguish between productive 

and final consumption. All goods of whatever character 

are intended to minister ultimately to the 

Productive satisfaction of some human wants. When 

and filial 

consumption, a utility is destroyed by the act of a person 
who derives from it the satisfaction which 
it was intended to provide, we have what may be called 
an act of final consumption. On the other hand, many 
goods are intended to serve merely as raw materials for, 
the manufacture of finished products, or as tools and 
machines by means of which finished products may be 
created. Raw materials are consumed when they pass 
over into the completed commodity, and tools and 
machinery are consumed as fast as they are worn out 
by constant use. All such destruction of materials and 
machinery may be called productive consumption. Such 
goods are destroyed, but their utility reappears in the 
utility of the finished product. Formerly it was cus- 
tomary to call the consumption of food by a laborer 
productive consumption, since it enabled him to produce 
more goods. But this usage exactly reverses the fun- 
damenxal fact that consumption is the end of all eco- 



STATISTICS OF CONSUMPTION. 99 

nomic activity, while production is merely a means to 
that end. When a product reaches the consumer and 
is consumed, it has served its economic purpose ; and the 
economist need not attempt to go beyond this fact, 

IV. Statistics of Consumption. 

§ 63. There are now available figures as to the income 

and expenditure of a large number of American and 

European families, which ffive statistical 

. . Engel'slaw. 

proof of the facts above outlined concerning - 

the order of consumption and the relative expansivity 

of various classes of wants. First, let us consider the 

facts demonstrated by Dr. Engel, an eminent Prussian 

statistician. These related to the cost of living in 

Prussia, and were as follows : — 

1. As the income of a family increased, a smaller 
percentage of it was expended for food. 

2. As the income of a family increased, the per- 
centage of expenditures for clothing remained approxi- 
mately the same. 

3. With all the incomes investigated, the percentage 
of expenditures for rent, fuel, and light remained inva- 
riably the same. 

4. As the income increased in amount, a constantly 
increasing percentage was expended for education, 
health, recreation, amusements, etc. 

These conclusions were drawn from the following' 
table of statistics : ^ 

1 See RoscHER, ii. 203 ; Ely, Economics, 244. Dr. Engel " has ad- 
vanced the theory that it might be possible by a careful study of a suffi- 



100 



PRINCIPLES OF ECONOMICS. 



Items of Expenditure. 



Subsistence 

Clothing 

Lodging 

Firing and Lighting .... 
Education, Public Worship, etc. 

Legal Protection 

Care of Health 

Comfort, Mental and Bodily 
Recreation 



Total 



Percentage of the expenditure of the 
family of 



A man with 
an income of 
from $225 to 
$300 a year. 



Per cent. 
62 



16.0 
12.0 
50 
2.0 
1.0 
1.0 

1.0 



95.0 



V 5.0 



100.0 



A man with 
an income of 
from $450 to 
$600 a year. 



Per cent. 
55.01 



18.0 
12.0 
50 
3.5 
2.0 
2.0 

2.5 



90.0 



10.0 



100.0 



A man with 
an income of 
from $750 to 
$1000 a year. 



Per cent 
50.0 
18.0 
12.0 

5.0 

5.5 

3.0 

3.0 

3.5 



^85.0 



15.0 



100.0 



§ 64. Subsequent investigations in the United States; 
and in Europe show the substantial accuracy of these 
Investigations statistics by Dr. Engel. Such recent inves- 
bureausV^ tigations are summarized in the Seventh] 
Massachusetts Annual Report of the United States Com- 

and of the 

United States, missioner of Labor, opposite. 
These statistics show that about nine tenths of the! 
income of very poor families are expended for the satis- 
faction of the mere existence wants, for food, 
shelter, and clothing. Nearly half of the 
income of such a family is expended for food alone. As 
the income of a family increases, its members prefer to] 

cient number of family budgets for a period of years to construct a sort] 
of social signal service. His idea is that changes in total expenditure anc 
in expenditures for various items in a sufficient number of typical fami- 
lies could enable us to predict the coming of industrial storms." 



Conclusions. 



ECONOMY IN CONSUMPTION. 



101 



Percentage of Expenditure for Families of Different 
Incomes. 





Income 
under 

«200. 


Income 


Income 


Income 


Income 


Income 

$1200 

and over. 


Object of 


$300 and 


$500 and 


$700 and 


$900 and 


expenditure. 


under 

S400. 


under 

$600. 


under 

$800. 


under 

$1000. 


United States. 
















Per cent. 


Per cent. 


Per cent. 


Per cent. 


Per cent. 


Per cent. 


Rent ..... 


15.48 


14.98 


15.15 


15.60 


14.96 


12.59 


Fuel 


7.07 


6.04 


5.63 


4.42 


4.00 


2.57 


Lighting .... 


I.OI 


.98 


.97 


.88 


.74 


.45 


Clothing .... 


12.82 


14.14 


15.27 


16 33 


16.84 


15.71 


Food 


49.64 


45.59 


43.84 


38.89 


34.34 


28.63 


All other purposes 


13.98 


18.27 


19.14 


23.88 


29.12 


40.05 


Europe^ 














Rent 


9 38 


11.93 


10.26 


9.49 


10.49 




Fuel 


5.38 


5.49 


3.32 


3.97 


5.19 




Lighting .... 


1.66 


159 


1.37 


1.20 


1.53 




Clothing .... 


19.08 


14.18 


15.21 


18.97 


14.15 




Food 


48.32 


49.58 


50.06 


44.00 


46.24 




All other purposes 


16.18 


17.23 


19.78 


22.37 


22.40 





expend a constantly increasing proportion of their means 
for the satisfaction of culture wants. The desires for 
food, for clothing, and for shelter are seen to be far less 
expansive than the higher needs, which constantly claim 
a larger portion of an increasing income. Evidently, as 
the means of a family increase, a larger surplus of 
utility over costs can be secured by reducing the pro- 
portion of the income expended for existence wants, 
and by diversifying the objects of family consumption. 



V. Economy in Consumption. Saving and Investments 

§ QB. By economy in consumption is meant securing 
the greatest amount of satisfaction obtain- Economy in 
able from a given expenditure or destruction consumption, 
of utilities. This necessitates (1) a knowledge of the 



102 PRINCIPLES OF ECONOMICS. 

most advantageous uses to which a good may be devoted, 
and (2) economy in the application of the good to the 
chosen purpose. The importance of such a rational 
ordering of our consumption is well expressed by a 
recent French writer in the following words: "The 
human race . . . could increase its welfare almost as 
much by a better ordering of its consumption as by an 
increased production of wealth, and this without any 
real retrenchment in consumption." 

It is highly desirable that men should develop their 
higher wants, and should have the means of maintaining 
a high standard of living. Rational economy 



aMghstand- does not imply the non-satisfaction of desir- J 



Economy and 
a Mgh stand- 

ar vmg. ^^^^ wants, but rather means abstinence 
from useless or injurious expenditure, and the most 
complete utilization of the goods devoted to the satis- 
faction of necessary and worthy desires. These aspects 
of the subject of economy require some consideration, 

§ QQ. Some kinds of expenditure produce effects 
which are directly pernicious to those who indulge in 

Injurious ^^^^^^ forms of consumption. Anything of 

consumption, ^jjjg ^Qy\^^ fQ^. instance intemperance, unfits a 
man for rendering to society the highest service of which 
he is capable ; and is condemned in advance as both 
wasteful and immoral. More need not be said here 
upon this topic. 

Other kinds of consumption are not in themselves 
directly pernicious, but may nevertheless be 

luxuiy. questionable. Luxurious expenditures are 
of this character. Every one knows that extravagance 



ECONOMY IN CONSUMPTION. 103 

and prodigality exist, and the careful observer will 
admit that these evils are not confined to any single so- 
cial class. Yet it is very difficult to frame any general 
definition of luxury, or to establish any general prin- 
ciples by which what is commonly termed luxurious 
expenditure may be judged. We must admit that men 
of great genius or ability have much greater needs than 
other men, and that they may wisely incur expenditures 
which others might not be justified in making. More- 
over, the luxuries of one time may become decencies or 
necessaries of the succeeding age. As Laveleye says, 
" A shirt for the body and a chimney in the house were 
great luxuries in the Middle Ages ; to-day they are neces- 
sities even for the poorest." Furthermore, it seems 
probable that some expenditures that might be called 
luxurious tend to develop finer tastes and the finer arts, 
and may in this way produce beneficial effects. A cer- 
tain amount of rational luxury is not to be indiscrimi- 
nately condemned. 

The question of luxury appears, therefore, to be a 
complicated one ; nevertheless, it is possible to lay down 
certain general principles. First, it is cer- jestfor 
tain that there exists in the world a large luxury, 
number of unsatisfied wants for the comforts, and even 
for the necessities, of life ; in other words, multitudes 
of human beings are destitute of the means for satisfy- 
ing most pressing wants. Every luxurious expenditure 
causes a sacrifice of the means, or the productive power, 
available for the satisfaction of other wants. The money 
that pays for the millionaire's palace might have built 



i04 PRINCIPLES OF ECONOMICS. 

an orphan asylum, or endowed a college. Since this is 
the case, we have the feeling that, in any instance of 
luxurious expenditure, the benefits derived from the 
outlay should be in some way commensurate with the 
sacrifice involved. If millions of dollars are lavished in 
ostentatious display during a hard winter, when multi- 
tudes of people are on the verge of starvation, we feel 
that there is an immense disproportion between the 
pleasure actually derived from such expenditure and 
the possible good that might have been accomplished 
with the resources thus squandered. While the law 
gives to every one the undoubted right to expend his 
property in whatever manner he may desire, yet there 
exists a growing feeling that the possession of wealth 
imposes upon a person the moral obligation of admin- 
istering that wealth as a social trust. This obligation, 
moreover, is as binding upon the possessors of small 
incomes as upon those who enjoy great riches. This 
feeling was expressed by Ex-mayor Hewitt, of New 
York, in his speech at the recent dedication of the new 
buildings of Columbia University. Speaking of the 
university, Mr. Hewitt said : " It will not lack the 
means of usefulness, nor the opportunity of expanding 
its influence, when the rich men of our city realize the 
opportunity which it affords for making the millions 
which they control fulfill the duty imposed by the pos- 
session of wealth, and by which alone its possession can 
be justified." On these principles, luxurious expendi- 
ture can be justified only when its results are propor- 
tionate to the sacrifice involved. Excessive luxury is 



ECONOMY IN CONSUMPTION, 105 

a violation of the moral obligation incumbent upon the 
possessor of wealth to administer his property as a trust 
for the welfare of society. 

§ 67. We have next to consider the question of econ- 
omy in the use of goods devoted to the satisfaction of 
reasonable and desirable wants. Probably 

. Economy in 

more loss is produced by wastefulness in the appucation 
this department than is caused by unde- °*^®^°^<^®^- 
sirable consumption. Economy in productive consump- 
tion will be treated of in the chapter devoted to pro- 
duction. At this point we shall be concerned mainly 
with economy in consumption. 

The statistics of family consumption previously pre- 
sented show that families whose incomes range from 
1200 to $1200 per year, spend from 60 to 

. Economic im- 

90 per cent of their incomes for the ordi- portanceof 

nary household expenses of rent, food, fuel, ^^^^^^^^p^^s. 

light, and clothing. These expenses fall, as a rule, to 

the direction of the wife and mother. Economy in the 

expenditure of from 60 to 90 per cent of the income 

of the ordinary family depends, therefore, mainly upon 

the skill and intelligence of the women who administer 

the affairs of the household. Here " a penny saved is 

a penny earned," and the practice of household economy 

has been hitherto the chief economic function of women. 

It has been demonstrated that there is 

Waste in con- 
a great deal of waste in family consump- sumption of 

tion, the real extent of which is not at all ^^' 

appreciated. The chief item of loss is in connection 

with the expenditures for, food. If we place the aver* 



106 PBJNCIPLES OF ECONOMICS. 

age income of an American family at 1500, — and it 
will not greatly exceed that figure, — then nearly |250 
of this amount is expended each year for food. Waste 
occurs in any or all of the following ways : (1) Need- 
lessly expensive foods containing little real nutriment 
are used ; (2) there is a failure to select the foods best 
suited to the needs of the family ; (3) a great deal is 
thrown away which ought to be utilized ; (4) bad prepa- 
ration of the food causes it to lose much of the nu- 
triment which it does contain ; (5) badly constructed 
ovens diffuse heat, instead of confining it, and cause 
enormous loss of fuel. We shall state less than the 
truth if we estimate that fully one fifth of the money 
expended for food is absolutely wasted, while the excess- 
ive expenditure often fails to provide adequate nutri- 
tion. In this manner, ten per cent of the income of the 
average family is uselessly squandered. This means a 
waste of $50 out of each family income amounting to 
8500.1 

Destruction by fire forms another enormous item of 
economic waste. Most buildings are examples of what 
Mr. Atkinson ^ calls " combustible architec- 
ture, and progress m slow-burnmg or fire- 
proof construction has been very slow. The methods 
of insurance companies have frequently put a premium 
upon incendiarism, while ignorant or willful carelessness 



1 See Atkinson, The Science of Nutrition ; Atwater, Food Waste 
in American Households. 

2 See Atkinson, Slow-Burning Construction, Our Enormous Loss by 
Eire ; also, Thomson, Waste by Fire. 



SAVING AND INVESTMENT. 107 

often enough completes the work of destruction. In 
1886 the property destroyed by fire in the United States 
was valued at 1100,000,000. Eight years later, Mr. At- 
kinson found that " the masters of combustible architec- 
ture " had improved upon their own work, and that the 
" last year's ash heap of the United States " represented 
property worth $150,000,000. Further illustrations are 
not needed to show the possibility of vastly increasing 
the satisfactions enjoyed by our people without increas- 
ing the production of wealth in any degree. 

§ 68. Having treated of spending, the first use which 
can be made of acquired wealth, we now come to a con- 
sideration of saving, the second use to which 
wealth may be put. Saving involves much 
more than the mere act of spending less tlian one re- 
ceives, and its ultimate consequences require considera- 
ble explanation. 

Saving may take the form of merely setting aside or 
storing up either money or useful commodities in sucli 
a way that they remain idle. This is called two forms 
hoarding, and may or may not be a useful of saving, 
and necessary way of providing for the future. In early 
times, or in periods when property has been insecure, 
this has been the principal way in which saving has 
been effected. Hoarding may be carried to such an 
extent as to lead to scarcity of the goods offered in the 
market. But in modern times, most saving takes a 
second and very different form. Nowadays people save 
wealth mainly by investing it in some productive enter- 
prise. With security of property assured, men prefer to 



108 PRINCIPLES OF ECONOMICS. 

invest their savings in productive industry rather than 
to hoard surplus wealth. The reason is that a perma- 
nent income may be secured in this way. The invest- 
ment may be made directly by the person, or indirectly 
through a bank, to which the work of investing savings 
may be intrusted. Investment, evidently, is the very 
opposite of hoarding. It does not withdraw goods from 
use, but invests them where they may aid to increase 
future production. While to some extent hoarding still 
takes place, for the most part saving means useful in- 
vestment, and not withdrawal of wealth from use. 

Let us compare the results of saving and spend- 
ing. The French economist Leroy-Beaulieu has con- 
saving and trasted the two as follows : " The man 
spending. ^]^o saves, in case he invests his savings 
directly or indirectly, spends as much and makes as 
much work as the prodigal, or the man who spends 
his entire income. But the object and the result of the 
spending and the work are different." Saving, " in 
place of making work for upholsterers, liair dressers, 
lace makers, meat cooks or pastry cooks, makers of fine 
carriages, etc., makes work for masons, ballasters, vine- 
dressers, machine builders, and other workers of the 
same sort." Saving, then, usually means spending ; but 
it means spending for the future, not for the present. 
Saving means, therefore, not a decrease in the demand 
for commodities ; but usually a demand for future goods 
instead of present goods, for the tools and materials 
necessary to future production rather than for the prod- 
acts of present or past industry. 



SAVING AND INVESTMENT, 109 

Our analysis of the results of saving enables us to see 
at once the absurdity of the idea that reckless and 
wasteful expenditure can be approved be- "spending 
cause it makes trade arood. Savino: makes ™®?®"^J®. 

° ° ma]£e trade 

trade good and causes a demand for prod- good." 
ucts just as truly as does spending. But spending 
inconsiderately leads to the destruction of utilities ; 
saving, to the ultimate increase of production. Yet 
many intelligent people and many important news- 
papers often excuse extravagance and profusion on the 
ground that they make trade good, and give employment 
to labor. 

Two reasons make saving a desirable habit in any 
people. Mrsty it cannot be repeated too often that the 
first economic duty of every man is to make Desirability 
himself a self-supporting, independent mem- of saving, 
ber of society. In order to do this it is necessary to 
save the means for supporting one's self in times of sick- 
ness or lack of employment, and also to make provision 
for old age. Saving may also be necessary in order to 
maintain the unity of the family upon the death of the 
father. But a second powerful reason makes saving 
a desirable thing. Modern economic life depends upon 
the extensive use of capital in production. Through the 
means of capital, man is gradually subjugating nature 
and substituting natural forces for human labor. Eco- 
nomic progress demands the constant creation of new 
capital, and capital-formation involves a willingness to 
prefer future goods to those which contribute alone to 
present enjoyment. 



110 PRINCIPLES OF ECONOMICS. 

VI. Demand. 

§ 69. We have seen that human wants are the cause 
of man's economic activities. Human wants create a 
demand for certain commodities and services 
--«^, which can be secured only through labor or 

sacrifice of some sort. In order to meet such a demand 
for commodities and services, all economic activities are 
directed. It will be well to close this chapter by a 
general statement of the law of demand. 

Since human wants are satiable, a single unit of any 
commodity will possess for any person or group of per- 
sons a decree of utility that constantly de- 
Demand and 
satiable creases as the supply of the commodity is 

wants. increased. At any moment, moreover, the 

importance which men will attach to any single unit of 
the supply will depend upon the utility of the last or 
marginal unit. Men will demand first those commodi- 
ties whose marginal utility most exceeds the cost or 
sacrifice necessary to obtain them. They will cease to 
demand any commodity as soon as its marginal utility 
ceases to exceed its cost. 

In obtaining desired commodities we are commonly 
called upon to sacrifice money, and we need to base our 

statement of the law of demand upon this 
Sacrifices 

measured fact. Money confers upon its possessor a 

general purchasing power, and a unit of 

money has to each individual a certain importance based 

upon its ability to procure satisfactions of all sorts. A 

man with an annual income of $500 knows that one 



DEMAND. Ill 

dollar represents one five-hundredth part of his total 
power each year to purchase commodities. The signifi- 
cance of a dollar to a rich man is generally much less 
than its importance to a poor man. As a person's 
supply of money increases, the marginal utility, or want- 
satisfying power of the marginal unit, of money con- 
stantly tends to become smaller. Nevertheless, every 
one has a certain general idea of the importance to 
himself of the general purchasing power represented by 
a dollar; and every one is constantly called upon to 
estimate the sacrifice which the expenditure of a dollar 
may involve. We may say, therefore, that demand is 
determined by a comparison of the marginal utility of 
commodities with the marginal utility of money. Men 
purchase those commodities whose marginal utility 
most greatly exceeds the marginal utility of the money 
required to purchase them. 

§ 70. We call the demand for a commodity large or 
small as the number of units of that commodity 

demanded bv the public is lars^er or smaller. 

•^ ^ ^ The general 

Now the extent of demand will vary accord- law of de- 

ing to changes, (1) in the marginal utility 

of the commodity, (2) the money cost, and (3) in the 

means or wealth of the purchasers or consumers. This 

may be illustrated by the three following cases : — 

1. If the price of sugar remains unchanged, say ten 

cents per pound, then the number of pounds that will 

be demanded will depend solely upon the utility of 

sugar. At one time it may be that consumers will use 

10,000 pounds of sugar before the marginal utility of a 



112 PRINCIPLES OF ECONOMICS. 

single pound falls so low that no one would care to 
sacrifice ten cents in order to purchase an additional 
pound. Now if tastes change, it may happen that con- 
sumers will buy 15,000 pounds before the marginal 
utility of a single pound falls below ten cents. 

2. On the other hand, let us suppose that the utility 
of sugar remains unchanged. At a price of ten cents 
a pound, we have seen that 10,000 pounds will be 
demanded by the consumers. Now if the price be 
reduced to five cents a pound, the number of pounds 
demanded may increase to 15,000. The reason for this 
increased demand is that the reduction in the marginal 
utility of a pound of sugar, caused by the increase of the 
supply to 15,000 pounds, is offset by the reduction in 
cost or sacrifice. The reduced cost leaves a surplus of 
utility over sacrifice, although the marginal utility has 
decreased. 

3. Suppose, finally, that both the marginal utility of 
sugar and the price remain the same, but that the wealth 
of the consumers is increased. Then the marginal 
utility of the five cents required to purchase a pound of 
sugar will decrease for the majority of the consumers. 
Under such circumstances more than 15,000 pounds 
may be purchased before the marginal utility of a pound 
of sugar falls below the marginal utility of five cents. 
Thus the increase in the wealth of the consumers may 
serve to increase the demand for sugar to 20,000 pounds 
at the price of five cents a pound. It would have exactly 
the same effect as a decrease in the price. 

§ 71. The law of demand may be summed up. First^ 



DEMAND. 113 

fche demand for any commodity will vary directly as its 
marginal utility, the cost being assumed to 
remain the same. Second, assuming the 
utility to remain the same, demand will vary according 
to the price. TJiird, changes in the wealth of the con- 
sumers act exactly like changes in price. An increase 
of wealth lowers the marginal utility of money and 
increases demand, while a decrease of wealth has 
precisely the contrary effect. 



114 PRINCIPLES OF ECONOMICS. 



LITEEATUEE ON CHAPTEE IV. 

General References : Andrews, Institutes of Economics, 79- 
82, 190-199; Ely, Outlines of Economics, 219-246; Laveleye, 
Political Economy, 243-263 ; Marshall, Economics of Industry, 
71-101, Principles of Economics, 159-213; Eoscher, Political 
Economy, I. 51-58, 11. 183-269; Walker, Political Economy, 
292-329. 

Special References : Hearn, Plutology, 12-23. A suggestive 
treatment of the subject of human wants. 

Jevons, Theory of PoliticalEconomy, 28 et seq. Treats of law of 
diminishing utility. Compare with Jevons either Wieser, Natural 
Value, 3-36, or Smart, Introduction to Theory of Value, 9-33. 

Patten, The Consumption of Wealth ; Dynamic Economics, 
39-49. These books are difficult to read, but are very suggestive. 
Consult them especially on the subject of the economic order of 
consumption. 

Say, Treatise on Political Economy, Bk. III. One of the earli- 
est discussions of consumption. 

Seventh Annual Eeport of the United States Commissioner of 
Labor, II. 860-865; Gould, Social Condition of Labor. These 
works give statistics of the actual consumption of families. 

Atkinson, The Science of Nutrition ; Slow Burning Construc- 
tion ; Our Enormous Loss by Fire. Mr. Atkinson has given much 
attention to wastes in cooking and by fires. 

Atwater, Food Waste in American Households. 

Thomson, Waste by Fire. 



PRODUCTION, 116 



( 



CHAPTER V. 

THE PRODUCTION OP WEALTH. 

I. Production in General. 

§ 72. The production of wealth does not mean the 
creation of material things which did not previously 
exist. Human powers are unable to create Definition of 
matter, and the utmost that man can do production, 
is to produce utilities. Production, therefore, means 
changing the form or the relations of matter so that it 
becomes better able to satisfy human wants. Wood or 
iron may be changed into the form of houses or ma- 
chines ; seeds may be placed in the ground where natural 
forces act upon them and result in the growth of plant 
life ; Dakota wheat may be transported to Liverpool, 
gaining increased utility by the change of place ; but 
in all such cases material objects and natural forces are 
merely so adjusted that they acquire a new power to 
satisfy wants. Production may be defined, therefore, 
as " the creation of utilities by the application of man's 
mental and physical powers to the physical universe, 
which furnishes materials and forces." ^ 

Every increase of utilities, however, is not the result 
of human activities directed expressly for that purpose. 

1 See Ely, Outlines of Economics, 90. 



116 PRINCIPLES OF ECONOMICS. 

We have seen that changes in human wants and tastes 
may increase the want-satisfying power of goods, or 
may destroy it. The utiUty of a piece of 
tion which is land may be increased by the natural growth 
* of the community, when no labor is exerted 
directly to increase the usefulness of the particular tract 
of ground. Various accidents which in no way result 
from human effort may suddenly increase the utility 
of many kinds of wealth. All such ways of creating 
utilities are not to be considered economic production. 
It has sometimes been thought that some forms of 
industry are more productive than others. But our 
analysis of the nature of production has 
of various shown US that the farmer, the manufacturer, 
the railroad employee, and the merchant 
are all alike engaged in rearranging or adjusting mate- 
rials in such a way that an increase of utility results 
from their labors. The manufacturer and the railroad 
engineer are assisted by natural forces to the same 
extent as the farmer. Moreover, such workers as 
teachers, doctors, lawyers, judges, policemen, soldiers, 
domestic servants, and the like, directly contribute to 
the increase of utilities, and should be considered pro- 
ductive laborers. All useful labor is productive of 
increased enjoyment, that is, of increased utilities. Only 
misdirected or inefficient labor is unproductive. 

§ 73. The labor of production involves a certain 

Production amount of toil which may be more or less 

and sacrifice, disagreeable, or even painful, according to 

circumstances. Some kinds of labor, as the labor of the 



PRODUCTION, in 

scholar or of the artist, may appear to be pleasurable in 
themselves. But in most such cases it will be found 
that the pleasure comes from the results of the labor, 
rather than from the bodily and mental exertion. For 
the majority of producers, labor involves bodily fatigue 
or even pain, and also the sacrifice of desired leisure 
and enjoyments. So true is this that it is claimed with 
reason that, if the fear of starvation and want should 
be removed, most men would not feel any incentive 
sufficient to induce them to carry on the labor of pro- 
duction. It should be emphasized that a certain amount 
of well-directed labor is a necessary discipline for man- 
kind, and that " an idle brain is the devil's workshop." 
When all is said, however, the fact remains that pro- 
duction necessitates sacrifice. On account of this, men 
are constantly seeking to produce wealth with less labor. 
This effort to economize labor is one of the principal 
forces that lead to economic progress. 

Practically all production requires a certain amount 
of time. Many weeks have to elapse between seed^ 
time and harvest, several months may be production 
required to convert trees into a house, while requires time, 
many years may pass before the construction of a rail- 
road or a canal can be completed. 

§ 74. A treatment of economic production should 
include a discussion of the production of each of the 
two kinds of economic ffoods, namelv, mate- 

^ ' " ^ The produc- 

rial goods and personal services. Yet a few tionofper- 

words only need be said concerning personal 

services. The first wants which any society must sat- 



118 PRINCIPLES OF ECONOMICS. 

isfj are the wants for subsistence and shelter. At an 
early period certain personal services will be desired ; 
and soldiers, lawgivers, priests, and domestic servants 
may appear in any society. The demand for personal 
services will be likely to increase as fast as the industry 
of any people becomes more productive, so that a smaller 
proportion of the total population has to be employed 
in the production of material goods. The general ten- 
dency of economic progress is to enable a smaller 
number of workers to produce the material wealth 
necessary for civilized life, and to set free a larger 
number of people to render personal services of all 
sorts. 

II. The Factors of Production. 

§ 75. Economists have recognized three factors of 

The three production, — nature, man or labor, and 

factors. capital. Man and nature are original or 

primary factors, while capital is a secondary or derived 

factor. 

§ 76. In a general way nature may be said to assist in 

production by furnishing man with standing-room, with 

materials, and with chemical and physical 
Nature as a c , i i 

factor of forces. The motor forces oi nature have been 

production. ■utjii2ed by man principally in the forms of' 

the muscular strength of animals, the motive force of; 

winds and streams, the expansive force of steam, and the! 

motive force of electricity. 

A detailed classification of nature's contributions to! 

production may next be presented. First, all productive 



FACTORS OF PRODUCTION. 119 

industry may be influenced by atmospheric or climatic 
conditions. These affect not only the animal and vege- 
table productions of a country, but also 
the vigor and character of the inhabitants, of nature's 
Second^ rivers, lakes, and seas should be 
mentioned. These may facilitate the transportation of 
persons and products ; and may furnish man with fish, 
corals, sponges, etc. Rivers may also supply the water 
power that turns the wheels of many productive indus- 
tries. Thirds we must notice the contributions of the 
land surface of the earth. The land contributes to 
production standing-room, plants and animals, mineral 
treasures hidden for the most part below the surface, 
and the mineral and vegetable elements that form fer- 
tile soils. Mere situation is often of the greatest im- 
portance, as is seen in the case of a city or country 
located at an important point along the routes which 
the commerce of the world is obliged to follow. 

Of the contributions of nature to production some are 
appropriable, while others practically cannot be reduced 
to ownership by individuals or by societies, some of na- 
Land is appropriable, as well as the products b^onrie^' 
secured from the land. Air and sunlight are appropriaWe. 
for all practical purposes not appropriable, except in so 
far as the enjoyment of them may depend upon access to 
certain pieces of land. The waters of the earth's surface 
cannot be appropriated, except in cases where access to 
them depends upon the control of land. Inland waters 
and the borders of the ocean to the extent of three miles 
seaward are appropriated by the nations that control 



120 PRINCIPLES OF ECONOMICS. 

adjacent territory. The appropriable contributions of 
nature are actually reduced to private ownership as 
soon as they become scarce relatively to human wants. 
When population is scanty, and men lead a nomadic life, 
land is not held as private property. But as numbers 
increase, and unoccupied land becomes scarce, the soil is 
brought under private ownership. 

Some writers have attempted to explain the whole of 
man's social as well as his economic life by reference to 
innuence of the influence of the natural surroundings of 
mMi?ecr" each community. In this way it is said that 
nomic life. the inland plains give rise to a pastoral form 
of economic life, that the seashore causes people to live 
as fishermen, and that forests produce the tribes of 
hunters. From the natural affiliation or combination of 
these three forms of simple economic societies, all com- 
plex or civilized societies are derived. But such a view 
exaggerates, as it is very easy to do, the extent to which 
natural surroundings determine the life of a people ; and 
it neglects the fact that man in a thousand ways may 
modify his environment. Man can reclaim land from 
the sea, can irrigate arid lands, can tunnel the Alps, and 
can construct a railroad through the Rocky Mountains 
or across the Andes. The economic development of our 
own country has been very greatly influenced by natural 
conditions. The infertility of the soil of New England 
compelled that section to utilize its forests for ship build- 
ing, and its rapid streams for power for manufacturing. 
The fertile soil of the South marked that section out as 
an agricultural region. The rivers of the Mississippi 



FACTORS OF PRODUCTION. 121 

Valley helped to extend settlements, and to facilitate the 
rapid growth of the interior of our continent. In general, 
it may be said that the tendency of economic progress is 
to free man more and more from the influence of nature. 
It took nearly two hundred years for English colonists 
to advance their settlements from the Atlantic coast to 
the valley of the Mississippi. But the steamboat and the 
railroad enabled the people of the United States to spread 
over the territory between the Alleghanies and the Pacific 
in three quarters of a century. 

§ T7. Labor is human exertion or effort directed toward 
the creation of economic goods. It is possible to distin- 
guish between physical and mental labor. Labor a factor 
In so doing one should remember that even of production, 
the rudest manual labor requires a certain amount of men- 
tal effort, however slight ; while mental labor may require 
the use of the eye, the ear, the tongue, and always of the 
brain. Between the work of the ditch digger and that 
of the philosopher there may be endless varieties and 
degrees of activity ; but all kinds of labor involve both 
physical and mental exertion, and differ from each other 
only in the degree in which the mental or the physical 
elements predominate. 

It will be found useful to classify the different forms 
of labor, as follows : — 

1. Discovery and invention. 

2. Occupation, or the procuring of the gifts Ciassificatioii 

of nature; e. 7., gathering wild plants, huntinsT °* different 

•n . 1 ^ . . . 1 \, , ^inds of labor 

Wild animals, extracting minerals from the earth. 

3. Production of materials by utilizing natural forces 



122 



PRINCIPLES OF ECONOMICS. 



SO as to produce changes of form; e. g.^ agriculture, stock 
breeding. 

4. Manufacture, or transforming raw materials into usefuJ 
products. 

5. Transportation of commodities and persons. Place 
utilities are produced in this way. 

6. Exchanging products and services. All kinds of com- 
mercial enterprises are included here. 

7. Organizing and superintending productive industries. 
An efficient organizer and superintendent is the most? useful, 
hence most productive, man in a factory. 

8. Prevention of loss; e. g., firemen, lighthouse keep- 
ers, etc. 

9. Eendering personal services of an economic character. 
This includes domestic servants at one extreme and members 
of the learned professions at the other. Those persons who 
make, interpret, and enforce laws are also included. Such 
services are productive directly of utilities which have an 
economic significance. Indirectly they may lead to a great 
increase of material wealth ; e. y., the services of the scientist 
or educator. 



The last two censuses of the United States showed 
that the workers of this country were distributed among 
the various occupations as follows : — 



Occupations. 


1890. 


1900. 


A trripnltiirp . .... 


8,565,926 
5,165,145 
3,326,122 

5,678,468 


10.381,765 
6,839,195 
4,766,964 

7,085,309 


Personal and Professional Seryices . . 

Trade and Transportation 

Manufacturing, Mechanical, and Mining 
Industries 


Total Persons in Gainful Occupations 


22,735,661 


29,073,233 



FACTORS OF PRODUCTION. 123 

The labor of production involves sacrifice, and even 
pain. Yet labor is a necessity, for without it " mankind 
would necessarily perish off the face of the „ 

, , , Economic 

globe even if all soils were fertile and all importance 
climates temperate." Labor is not, how- 
ever, an end in itself, but merely a means to the end of 
satisfying human wants. Many persons often act on the 
principle that whatever makes w^ork for men to do is a 
blessing, and whatever lessens labor is an injury. From 
the point of view of the w^orkman directly affected by it, 
a labor-saving machine is often regarded as an enemy ; 
but from the point of view of the general public, cheaper 
methods of production are a very desirable thing. 

The efficiency of a laborer depends, j^rs?^, upon his indi- 
vidual characteristics, and, second, upon the wisdom with 
which his labor is employed and directed, — -j^^ efficiency 
that is, upon industrial organization. Post- of labor, 
polling for a time the second factor, we will now consider 
individual endowments and abilities as causes affecting 
the efficiency of labor. In this particular the most 
marked differences exist between various groups of 
laborers. The inherited strength or vigor of the work- 
man is one important cause of his efficiency or ineffi- 
ciency. Men of one race may exceed by one hundred 
per cent men of another race in mere muscular strength 
or in capacity to endure toil. Acquired knowledge, skill, 
and dexterity are second causes of efficiency. Many 
workers show an utter inability to learn to do any- 
thing in a really thorough manner. Good food and com- 
fortable shelter are third requisites of effective labor. 



124 PRINCIPLES OF ECONOMICS. 

Underfed laborers lack vigor and energy, while un 
healthy lodgings enfeeble the workman and cause 
disease. The mental and moral qualifications of the 
laborer form fourth factors of efficiency. Intelligent 
and conscientious workmen require less superintend- 
ence, can be intrusted with work for which any others 
are unsuited, and prove most effective and least waste- 
ful. Finally, the social esteem in which labor is held 
and the social position accorded to the laborer are fac- 
tors of the utmost importance. Where labor is con- 
sidered honorable service, and where all opportunities, 
political, economic, and social, are open to the man who 
renders most effective service, laborers will display en- 
ergy and ambition which will vastly increase the value 
of their work. The contrast between the United States 
and many other countries is most marked in this 
particular. 

§ 78. The number of laborers in any country will de- 
pend upon the growth of population, and the question of 

The supply of population deserves attention at this point. 

latwr. Tj^g natural growth of population depends 

upon the proportion which births bear to deaths. In a 
community of 10,000 persons, 800 births or deaths per 
year will give a birth or death rate of 30 per thousand. 
If both the birth rate and death rate are 30, then popu- 
lation will remain stationary. If the birth rate should 
increase to 35 and the death rate fall to 25, the annual 
increase of population would be 10 per thousand, or one 
per cent. In 1892 the birth rates of different European 
countries varied from 40.3 in the case of Hungary, to 



FACTORS OF PRODUCTION. 



125 



22.1 in the case of France ; while death rates varied 
from 35 in tlie case of Hungary, to 17.8 in the case of 
Norway. Thus Hungary's large birth rate was offset by 
her large death rate, so that the net increase of popula- 
tion was only 5.3 persons for each thousand inhabitants. 
On the other hand, Scotland, Norway, and Germany, the 
countries showing the largest net increase of population 
in that year, had smaller birth rates but much smaller 
death rates, as follows : — 



Couutry. 


Birth Rate. 


Death Rate. 


Net Increase. 


Scotland 
Norway- 
Germany 


30.8 
29.6 
35.7 


18.5 
17.8 
24.1 


12.3 
11.8 
11.6 



At the present moment the population of civilized coun- 
tries is generally increasing. Within one hundred years 
the population of Europe has increased from 175,000,000 
to more than 357,000,000. At the same time the birth 
rate shows a constant decrease. This has been more 
than balanced, however, by a large decrease of the death 
rate, so that the net result has been a gain in popula- 
tion. In the United States vacant lands have afforded 
abundant room for millions of immigrants, so that the 
growth of numbers has been remarkably rapid. 

Manifestly the increase of population is limited by 
the ability of mankind to procure from the 

Limits upon 

earth necessary subsistence. During the last growth of 
century the productivity of industry has so '°^ 
increased that the lands of civilized countries are able 



126 PRINCIPLES OF ECONOMICS. 

to support largely increased populations in far greatei 
comfort than smaller numbers formerly enjoyed. Wealth 
has increased much faster than population. On the 
other hand, it may be said that the present rate of 
increase of numbers cannot be maintained forever. If 
the population of the world should continue to double 
every one hundred years, as that of Europe has actually 
done during the past century, there would be ultimately 
more people in the world than could find mere standing- 
room, to say nothing of subsistence. Population does 
not, however, increase indefinitely in any such geo- 
metrical ratio. In uncivilized countries famine and pes- 
tilence, if no other cause, keep down numbers to the 
limits imposed by the available supply of food. The 
majority of civilized men prudently restrict the growth 
of population; so that it may happen, as has been the 
,case during the last hundred years, that wealth of all 
kinds increases faster than numbers. 

A word should be said concerning the influences which 
cause tlie population of civilized countries to adjust itself 
The standard ^0 ^he ability of the people to increase the 
ofUving. production of wealth. Each class of people 
in any society is accustomed to enjoy a greater or less 
amount of the comforts or luxuries of life. The amount 
of comforts or luxuries customarily enjoyed by any class 
of men forms the " standard of living " of that class. 
Prudent people will not marry and assume the bur- 
den of the support of a family until they possess in- 
comes that will enable them to maintain themselves in 
the same degree of comfort that they have been accus- 



FACTORS OF PRODUCTION. 127 

romed to enjoy. In proportion as people are prudent 
enough to insist on maintaining their customary stand- 
ard of living, or even to desire to raise their standard, 
the number of marriages, and hence the numbers of 
the population, will be adjusted to the limits imposed by 
the amount of wealth possessed by such persons. 

The standard of living is not fixed, but may be either 
raised or lowered. Educational influences which arouse 
new and higher wants tend to lead people The standard 

to demand an increased share of comforts or tJ^^l^^^ 

oe raised or 

luxuries, and tend to deter men from assum- lowered, 
ing the burdens of a family until assured of the means 
of maintaining the higher standard of living. On the 
other hand, there are considerable numbers of people in 
any community who raise families which they have no 
prospect of being able to support in a manner which 
will be considered comfortable or decent, even by mem- 
bers of the social class to which they belong. Such 
people constitute a large part of our pauper classes, and 
have no one but themselves to blame for the suffering 
caused by their own reckless conduct. In other cases, 
through misfortune or a commercial crisis a family 
which was once accustomed to a high standard of living 
may be unable to maintain such a standard, and may 
suffer want through no fault of its own. When this 
happens, the great danger is that the family may become 
accustomed to the lower plane of living, may lose ambi- 
tion to improve its position, and may remain perma- 
nently on a lower level of economic life.^ 

1 See Walker, The Wages Question, 81-88. 



128 PRINCIPLES OF ECONOMICS. 

Many interesting faets illustrate the manner in which 

the growth of population is adjusted to the ease with 

which the available wealth of the community 

Illustrations. 

will permit a family to be supported. Early 

in this century wages in England were low, and the 
laboring classes generally expended more than one half 
of their incomes for bread. Under such circumstances 
statistics showed that the number of marriages increased 
when wheat was cheaper, and decreased when it became, 
dearer. Later on, wages increased very greatly, so that 
the laborers spent a smaller proportion of their incomes 
for bread, and more for other things. Then it was 
noticed that the marriage rate no longer fluctuated as 
the price of bread changed, but that it varied according 
to the general commercial prosperity of the country. 
Another illustration may be taken from English experi- 
ence. Early in the present century, the Poor Laws of 
England were so unwisely administered as to make it 
far too easy for families to secure poor-relief. This 
made it unnecessary for laborers to exercise even the 
former degree of prudence in contracting marriages, 
and the result was a very rapid growth of numbers. 
Moreover, as the laziest and least enterprising people 
took most advantage of the poor-relief, this increase of 
numbers occurred in the least desirable elements of the 
English population. A great deal of other experience 
confirms the conclusion that it is always dangerous to 
relieve poverty in any manner which destroys each man's 
responsibility for the support of his family. Unwisely 
managed charity merely allows the families of the shift- 



FACTORS OF PRODUCTION. 129 

less and worthless to increase ; and this, too, at the 
expense of the industrious and enterprising people who 
are taxed for the support of charitable institutions. 
Those who have had most experience in managing 
benevolent enteiprises are the most strenuous in de- 
nouncing unwise and indiscriminate poor-relief as a 
crime against society. 

Economic progress is generally marked by an increase 
of wealth. Whenever such an increase occurs, a question 
of the utmost economic importance arises : Economic 
What will be done with the increased ?f ^/"^^"^ 

the standard 

wealth ? It may be used to support a of living, 
larger population at the same standard of comfort 
which previously existed ; it may be used to support the 
same population in greater comfort ; or, finally, it may 
be used partly to increase the standard of living and 
partly to increase numbers. In the present century the 
growth of wealth has served to double the population of 
civilized countries, and to more than double, perhaps, 
the comfort in which people live. If all increase of 
wealth is used for supporting a largely increased popu- 
lation, little or nothing is gained so far as the general 
welfare of each individual is concerned. Whenever 
wealth increases, and incomes increase, it is of the 
utmost importance that a wise use should be made of 
the new wealth. If it is used to raise the standard of 
comfort, there will be a permanent gain in economic 
prosperity. If, on the other hand, it serves merely to 
increase numbers, society will remain at the same eco- 
nomic level which it formerly occupied. 



130 PRINCIPLES OF ECONOMICS. 

In the United States, highly unusual circumstances 
have tended to obscure the fact that population has to 
Circumstances ^^ adjusted to the incomes of any people, 
of the United and that there are ultimate limits beyond 
highly ex- which at any given time an increase of popu- 
ceptionai. lation is undesirable. Our numbers have 
been confined to the limits set by income, but the ease 
of earning a large income has been so great that popu- 
lation has seemed capable of increasing without limit. 
We have had a smaller population than was absolutely 
needed in order to subdue our vast unoccupied terri- 
tory, and to develop our natural resources to the best 
advantage. Although the most desirable portions of ■ 
our arable lands are now occupied, we yet have 
room for many millions of additional inhabitants. So 
long as every newcomer could be given a farm, each 
increase of numbers might mean simply one more 
laborer engaged in agriculture ; and no increase of 
population could result in a lower standard of living. 
But such a condition of things cannot last forever, and 
population cannot continue to increase as rapidly as it 
has in the past. In fact, the rate of increase has per- 
ceptibly declined in recent years. From 1870 to 1880| 
the percentage of increase was 30.08, a smaller percent- 
age than was ever before known except during the 
decade which included the Civil War. But from 1890 
to 1900 the percentage of increase fell still further to 
20.70 per cent. In the older sections of the United 
States, where population is more dense, there has been a 
marked decrease in the birth rate. As fast as the other 



FACTORS OF PRODUCTION, 131 

portions of the country become more thickly settled, the 
same thing will be noticed there. Our population will 
continue to grow for a long time to come, and our stand- 
ard of living may continue to rise. But the rate of 
increase will grow smaller, because the elevation of the 
standard of living will require prudence in adjusting the 
number and size of families to available income. 

§ 79. Man and nature are the original factors of pro- 
duction. But in all labor except the most primitive 

forms, a third factor, capital, is needed. The 

7 r 7 Capital as a 

hands of man unaided would hardly be able to factor of 

do more than to gather wild fruits and nuts, ^^° ^^ 

and to secure a few of the gifts which nature yields to 

the labor of mere appropriation. Most economic goods 

cannot be secured by the direct application of man's 

efforts to his physical surroundings. It is necessary 

for man to apply his labor in an indirect manner. If 

he will first fashion for himself fish nets and huntins: 

weapons, he may then secure fish and game that he 

otherwise would be unable to procure. If he will first 

devote some labor to the manufacture of shovels and 

plows, he may place seeds in the ground in such a 

manner that natural forces will cause them to yield an 

abundant harvest. If he will first construct a water 

wheel or invent a steam engine, he may harness the 

motive forces of water and steam, and may apply them 

to the production of results which no amount of unaided 

human effort could possibly achieve. It is evident that 

in all such cases men adopt an indirect method of 

satisfying their wants. They first produce tools and 



132 PRINCIPLES OF ECONOMICS. 

machinery, and then utilize these instruments in their 
efforts to secure desired want-satishers. In this way 
men first labor to secure various instruments of produc- 
tion, and then by means of such appliances, are enabled 
to satisfy their wants more fully than would otherwise 
be possible. 

Indirect methods of production are far more efficient 
than direct methods, because indirect production may 
Indirect or enable man to utilize all the available ma- 
mettods°o? terials and forces of nature. Such materials 
production, as the useful metals could never be brought 
into a form adapted to any human use without the aid 
of instruments and appliances of indirect production, 
Even such a material as wood could never be reduced 
to a condition of greatest usefulness without indirect 
methods. Many of the forces of nature cannot aid very 
greatly the processes of direct production. Heat and 
moisture cannot act most efficiently upon the seeds un- 
less the soil has been properly prepared by the use of 
suitable instruments. Air, water, steam, and electricity 
are powerless to assist in the labor of production unless 
men construct suitable appliances to bring these forces 
into operation in the right manner. By an indirect proc- 
ess, therefore, man can secure the fullest cooperation 
of nature, and can vastly increase the production of 
wealth. 

Capital, then, consists of all the intermediate products 
Definitionof which man creates for the purpose of using 
capital. them in the production of finished consump- 

tion-goods. It is produced for the reason that its use 



I 



FACTORS OF PRODUCTION. 133 

serves to economize human labor, and to utilize fully 
natural materials and forces. The wealth which men 
produce may, therefore, be divided into consumers^ goods^ 
ready for final consumption, and producers^ goods, or 
intermediate products designed to be used in the produc- 
tion of future wealth. In this chapter we have to con- 
sider capital as a factor of production merely. Our 
definition, therefore, must be a definition of productive 
or social capital, and must explain the part which capi- 
tal plays in the process of indirect production. 

§ 80. The concrete forms which productive capital 
may assume are as follows : — ■ 

1. Productive improvements upon land, such as fences, 
drains, fertilizers, etc. The land in itself is a gift of nature, 
not a product of human industry. It is not 

created by man to serve as an aid to indirect productive 
production. Productive improvements may be capital, 
counted as capital so long as they can be distinguished fron? 
the land itself. Fertilizers or drains become, in a shorter 
or longer time, indistinguishably merged with the land. 

2. Buildings, such as factories or workshops, devoted to 
the purpose of aiding in the process of indirect production. 

3. Means of transportation, such as roads, canals, and 
railways. 

4. Raw materials, such as iron, wood, cotton, silk, and 
wool, which are consumed in the act of pit)duction, but 
re-appear in the product. 

5. Auxihary materials, such as coal, lubricating oils, 
and bleaching materials, which aid the productive process, 
but do not re-appear in the product. 

6. Tools and machines. Within the last century these 
have become the most important form of capital, in many 
respects. 



134 PRINCIPLES OF ECONOMICS. 

7. Domesticated animals used in production. Breeds of 
domestic animals have been so improved by scientific breed- 
ing that they are distinctly a product of human industry. 

8. Money, weights and measures, and scales and balances. 
We shall soon see that these objects are a most important 
means of carrying on capitalistic or roundabout production. 

9. Commercial stocks of finished products or consumers' 
goods. These do not include consumers' goods in the hands 
of the final consumers. Strictly speaking, finished products 
should not be called consumers' goods until they reach the 
final consumers. Capitalistic production would be impos- 
sible if capitalist-producers did not produce goods for dis- 
tant markets and for a future season's consumption. 
Wheat must be produced in one season, and a sufficient 
stock must be carried over to last until the next harvest. 
Spring dress goods must be produced several months in 
advance of the season when they are demanded. Agricul- 
tural implements, made in America and exported to Australia, 
may be several months in reaching the final consumer. 
Merchants perform the important social function of carry* 
ing all such commercial stocks of goods as require weeks 
or months to pass from producer to consumer. Com- 
mercial or mercantile stocks of finished products are an 
indispensable aid to the process of capitalistic production, 
and fall under our definition of capital. They are really 
producers' and not consumers' goods. They are materials 
to which time and place utilities are being added by the 
merchants who forward them to consumers. 

10. Capital used by persons who render personal services. 
The instruments of the surgeon, and the books and scientific 
apparatus of the student are examples. A fuller classifica- 
tion would include at least the following objects under this 
form of capital : (a) all scientific and professional instru- 
ments and apparatus ; (6) churches, theaters, public halls, 
and all buildings necessary for rendering personal services ; 



FACTORS OF PRODUCTION. 135 

(c) court houses, jails, forts, warships, government build 
ings, and all the appliances necessary for public functions. 
All these are means of producing indirectly services which 
could not be rendered directly without such appliances. 

§ 81. Something more should be said concerning two 
things which have been excluded from the above list 
of the concrete forms of capital. Land was j^^^ 
excluded because it is primarily a gift of apired f acui- 
nature, and not a product of human Indus- productive 
try devoted to the purpose of capitalistic *^^p^^- 
production. Yet it should not be forgotten that inde- 
pendent productive improvements are capital. More- 
over, such improvements are so common that land often 
ceases to be a mere gift of nature. Much land owes 
part of its usefulness to labor expended upon it. Never- 
theless, certain properties of land are always exclusive 
gifts of nature, and not the result of human labor ex- 
pended directly in their production. Some soils are 
naturally more fertile or more lasting than others. A 
north slope is less fertile than a south slope. The loca- 
tion of a farm with respect to the market, or of a city 
lot with respect to the center of business activity, i? 
wholly independent of labor devoted directly to that pur- 
pose. Some economists have included knowledge and 
acquired faculties among the forms of capital. But 
this is unnecessary, since all such things are included 
in the efficiency of labor, another factor of production. 
More than this, such faculties are a part of man him- 
self, not a part of his possessions. He may sell the 
use of his faculties, but cannot part with them. For 



136 PRINCIPLES OF ECONOMICS. 

these reasons knowledge and acquired faculties are not 
to be considered capital. 

Not a few writers have held that food and clothing, 
the subsistence of laborers, are to be considered capital, 
Capital and since they enable the workers to produce 
subsistence, more wealth. But we have already seen 
that food and clothing in the hands of the laborers are 
consumption-goods, and that when a consumption-good 
reaches tlie consumer it is finally destroyed. Further 
than this the analysis of the economist need not go. 
Food and clotliing that are in the hands of manufactur- 
ers and merchants, however, form part of the mercan- 
tile stock of the community, and are to be regarded 
as capital. Such commodities, although they may be 
finished products, are more properly to be considered 
producers' goods, to which time and place utilities are 
being added by the process of forwarding the goods to 
consumers. 

We have already seen that production requires time. 
In the simplest forms of production, when man merely 
Mercantile appropriates a natural product, such as 
ca^^^^aiirtic ^^^^^ fruits, fish, or game, only a very short 
production. interval may elapse between the exertion 
of human labor and the attainment of the desired ob- 
ject. On the other hand, the production of an agricul- 
tural product may require several weeks, while the 
construction of a canal may require many years. In 
all cases where indirect production is carried on, a cer- 
tain time must elapse before the formation of capital 
will be rewarded by the increased product of consumers' 



FACTORS OF PRODUCTION. 137 

goods. During the process of production the laborers 
must have food, shelter, and clothing. They are pro- 
vided with these things out of the stocks of products 
which merchants are constantly forwarding from pro- 
ducers to consumers. Laborers themselves seldom keep 
on hand any large amount of subsistence-goods. They 
expect to receive, from time to time, wages which may 
be expended in purchasing food and clothing out of the 
mercantile stocks of completed products which exist in 
all civilized communities. In modern society middle- 
men, or merchants, perform the important functions of 
accumulating subsistence-goods and all other com- 
modities at the seasons when they are produced, and 
then of distributing them to consumers as fast as 
demanded. 

§ 82. We may distinguish between fixed and circu- 
lating capital. Fixed capital consists of objects which 
serve to assist several acts of production. 

^. , ,. •. 1 • 1 . . , other classifi- 

(Jircuiatmg capital is consumed m a single cations of the 

act of production. All raw materials are ductivfcaT- 
circulating capital ; tools, machinery, and *^- 
buildings are fixed capital. Since the wonderful inven- 
tions which caused the Industrial Revolution, the use of 
machinery in all branches of production has increased 
at a constantly accelerating speed. This has caused the 
proportion of fixed capital used in modern production 
to increase at a rapid pace. Another important dis- 
tinction is between free and specialized capital. Free 
capital exists in such a form that it may be applied to 
any one of many industries; specialized capital is in- 



138 PRINCIPLES OF ECONOMICS. 

vested in such a way that it assumes a fixed form, and 
cannot be withdrawn for investment elsewhere. Coal, 
lumber, iron, and steel are relatively free to be invested 
in one or many different kinds of industry. Kailroads, 
canals, blast furnaces, and carpet looms are examples 
of specialized capital which is nearly worthless for any 
purpose except one single form of production. 

§ 83. Many reasons make it desirable for us to have 
a clear conception of what is required for formation of 
productive capital. The first thing that is 
of capital- necessary is that men should perceive that 
the indirect or capitalistic method of produc- 
tion will enable them either to produce more goods than 
would be possible by direct production, or to produce 
goods which direct methods would never enable them to 
secure. Obviously, the second step is for men to under- 
take the labor of collecting the materials and fashioning 
the tools necessary for the process of indirect production. 
The production of the various forms of capital is, there- 
fore, the second step in capital-formation. But this 
step will not be taken unless men are willing to work 
for future products, available only after capital has been 
created and has been used to produce consumers' goods. 
In other words, it is necessary to labor for future enjoy- 
ments instead of present, to prefer a greater quantity or 
variety of future goods to a smaller number of pres- 
ent satisfactions. Capital-formation requires, therefore, 
abstinence from present satisfactions and the willingness 
to labor for products that will be available only in the 
future. Economists have expressed this idea by saying 



FACTORS OF PRODUCTION. 139 

that capital is the result of abstinence, as well as of 

production. 

All capital is the result of production, but the work 

of capital production is actually performed under two 

different sets of circumstances. First, a „ ,^ , , 

' Methods of 

farmer or a mechanic may produce capital capitai- 
for use in his business by building fences, 
digging drains, and improving fields, or by constructing 
a workshop and making tools. Second^ capital may be 
produced by laborers who are hired to make it for other 
people. This takes place when a person saves a portion 
of his income, and invests the savings in a productive 
enterprise. Such a person may hire laborers to make 
tools and machines, or to build and equip a factory. 
He may buy shares of a business corporation, and thus 
turn his savings over to be invested by its managers. 
Again, he may place his savings in a bank, and allow 
them to be invested by the officials of that institution. 
In all these cases, what the person really does is to use 
his savings for the purpose of hiring laborers to produce 
various forms of productive capital. Savings banks have 
a peculiar importance, since they accumulate very small 
deposits from many depositors and secure large capi- 
tals for investment purposes. In the year 1905-06 
the savings banks of the United States held deposits 
amounting to $3,482,000,000. This sum belonged to 
8,027,192 persons, and represented an average deposit 
of $433.79 for each depositor. 

We have seen that the production of capital will not 
take place unless a man prefers to labor for future goods 



140 PRINCIPLES OF ECONOMICS. 

rather than for present. Working for future pleasures 

requires abstinence from present enjoyments. This is 

Abstinence true whether a person produces capital him- 

^A *^^ . + self, or saves out of his income a surplus 

inducement ' . ^ 

to saving. with which he purchases productive capital. 
A controversy has arisen concerning the amount of 
abstinence that is involved in saving. It is very evident 
that a person with an annual income of $500 will have 
to sacrifice the enjoyment of many present pleasures in 
order to save $100 each year. On the other hand, it has 
been denied, sometimes with great ridicule, that the 
savings of the rich man require any real abstinence to 
be incurred by him. Thus Ferdinand Lassalle, the 
socialist, wrote : " The ascetic millionaires of Europe ! 
Like Indian penitents or pillar saints they stand on 
one leg, each on his column, with straining arms and 
pendulous body and pallid looks, holding a plate toward 
the people to collect the wages of their Abstinence. In 
their midst, towering up above all his fellows, as head 
penitent and ascetic, the Baron Rothschild ! " But, as 
we have used the word, abstinence means desisting from 
some present pleasure in order to procure some future 
result. It does not imply that a rich man has to live 
abstemiously in order to save even large amounts of 
money. It means simply that when a millionaire builds 
a cotton factory instead of a palace or a yacht, he 
sacrifices present to future enjoyments. He may save 
$100,000 more easily than a poor man saves $100, but 
abstinence from present goods is necessary in the one 
case as in the other. Since saving does, therefore, 



FACTORS OF PRODUCTION. 141 

require abstinence or the sacrifice of present pleasures, 
it follows that the amount of saving which people will 
practice will vary according to the difficulties of, and the 
inducements to, saving. Security of invested property is 
the first and most important inducement. Whenever 
such security is destroyed, little saving is carried on. 
A fair rate of interest on invested capital is another 
inducement. Yet it cannot be shown that there is any 
minimum rate of interest that will absolutely stop all 
saving. On the other hand, high rates of interest are 
sure to lead to an increase of the supply of productive 
capital. A third inducement to saving is the desire to 
provide for the comfort and integrity of one's family. 
A very low rate of interest will not deter a father from 
providing for the future support of his family in case of 
his death. We conclude that saving capital does involve 
a certain degree of abstinence, and that the amount of 
saving will vary directly as the inducements offered. 

Social, or productive, capital can be maintained only 
by constant investments of new capital. Raw materials 
are continually being used up ; tools and ma- 

. \ Capital is 

chines wear out m the course of time ; fac- maintained 
tories, railroads, and canals require constant ^y^y^con-* 
repairs. Each year a portion of the savings ^^^^ invest- 
of any people must be devoted to replacing 
capital destroyed during the last productive period. 
Thus existing capital would rapidly diminish if saving 
should cease to be practiced. Stocks of productive capital 
can be increased only by making good the annual loss, and 
then investing additional capital in new enterprises. 



142 PRINCIPLES OF ECONOMICS. 

III. The Localization of Industry. 

§ 84. The location of his establishment is one of the 
chief concerns of the entrepreneur^ since a mistake is 
Importance of lively to prove fatal to the undertaking no 
location. matter how well it may be managed in other 
respects. What is true for one establishment is true for 
all ; the proper localization of industries is therefore an .j 
important element in the organization of production, 
determining, as it does in large measure, the efficiency 
with which labor and capital are applied. 

If other conditions were equal, industrial establish- 
ments would always be located as near as possible to 
Proximity to ^^^ consumer, in order to save time and 
the market, effort in transporting and exchanging their 
pl'oducts. Even as it is, proximity to the market is a 
highly important factor in determining the localization | 
of production. " Nearly 48 per cent of the manufac- 
turing of the country," our census tells us, " is in Massa- 
chusetts, Connecticut, Rhode Island, New York, New 
Jersey, and Pennsylvania, not so much because there is I 
better water power or more abundant material for man- 
ufactures in these states, but very largely because the 
greatest population was there when the manufacturing 
development of the country began." Decade by decade, 
as the center of our population has moved toward the 
Mississippi River, the center of manufacturing industry 
has migrated in the same direction. In the case of 
bulky or perishable products, proximity to the consumer 
always remains a decisive influence unless climate or 
the impossibility of securing materials absolutely forbids 



LOCALIZATION OF INDUSTRY. 143 

the establishment of an industry. Bricks are usually 
made near the locality where they are used, and fresh 
fish and fruit were formerly consumed at the place 
where they were produced. Improved transportation 
facilities have recently revolutionized the fruit trade, 
enabling California grapes and Georgia peaches to reach 
the New York and Boston markets. Yet, with bulky 
or perishable goods, local needs are very likely to be 
supplied by local production. 

But " other conditions " are not usually equal, and a 
number of different factors enter into the determination 
of the location of industries. Climate and 

Conditions of 

soil have a preponderating influence upon climate and 
agriculture, and for this reason many com- 
munities draw their principal supplies of food or vege- 
table fibres from distant regions.^ This is the case 
to-day with the nations of western Europe and with the 
northeastern states of our American Union. 

Then the presence of mineral deposits and valuable 
forests tends to attract manufacturing industries to a 
locality, since it is often more expensive to Mineral 
transport the raw materials of an industry resources, 
to a factory than it is to ship the finished product.^ 
Deposits of coal attract iron and steel producers, for it 
costs less to carry ore to the fuel than to perform the 
reverse process ; yet in recent years American producers 

1 Among agricultural products the cultivation of cotton, tobacco, tea, 
and coffee is strictly confined by peculiarities of soil and climate to a few 
parts of the world ; wool raising is less highly locaUzed ; and the cultiva- 
tion of the cereals most widely distributed, 

2 Clay, sand, and logs can be transported but a short distance before 
the cost of carriage equals the value of the freight ; while pottery, glass- 
ware, and furniture can be shipped hundreds or even thousands of miles. 



144 PRINCIPLES OF ECONOMICS. 

have been carrying increased quantities of Pennsylvania 

coke to the shores of Lake Erie, there to be used in 

smelting ore brought from Minnesota. When coal and 

iron ore are found in hills adjoining the same town, as 

is the case at some points in Alabama, nature would 

seem to have predestined a locality for the seat of iron 

industries. In the same manner, an abundant supply of 

lumber drew such industries as paper making to Maine, 

New Hampshire, New York, and Wisconsin, while it 

attracted furniture makers to Michigan.^ 

Water ways and water power influence strongly the 

localization of industry. Pittsburg and St. Louis owe 

their remarkable growth to their position at 
Waterways . „ 

and water or near the junction of important rivers; 

power. ^^^ ^^^ many flourisliing cities on the Great 

Lakes, from Buffalo to Duluth, testify to the importance 
of water ways.^ At Pittsburg the bulky materials used 
in the iron industry could be cheaply assembled in the 
early days when they were all drawn from' the mines of 
Pennsylvania; and to-day a short railroad haul brings to 
the city the ores of Michigan and Minnesota, which are 
carried by water to ports on Lake Erie at the lowest 

1 The influence of accessibility to materials is seen in the growth of 
cotton manufacture in the South, in the concentration of the meat pack- 
ing industry in the corn belt where cattle are fattened, in the location of 
pottery industries near deposits of clay, etc., also in the location of fac- 
tories for the manufacture of products made from waste materials near 
the industries that supply the waste. 

2 Since the advent of railroads water ways have become somewhat 
less important. Superior railway facilities contribute very largely to 
the advantages enjoyed by such cities as Peoria and Kansas City, to say 
nothing of Chicago, through which nature compels all lines connecting 
the great Northwest with the East to pass. Yet water transportation is 
still to be reckoned with in comparing one locality with another. 



LOCALIZATION OF INDUSTRY. 145 

possible expense. Water power was a factor of great 
influence in earlier days, when Lowell, Lawrence, Man- 
chester, Holjoke, Paterson, Rochester, and Minneapolis 
secured their start in manufacturing industry ; but later 
the increasing use of steam power ^ rendered it some- 
what less important. Recent developments at Niagara 
Falls and elsewhere have given a marked impetus to the 
employment of water power in generating electricity. 

Accessibility to a suitable labor supply is another im- 
portant factor in the problem. In the United States 
about one half of all the manufacturing is proximity to 
done in one hundred principal cities; while labor supply, 
about four fifths of all our factories are located in the 
1,340 cities and towns, and less than one fifth in the 
rural districts. As the census explains, " Manufacturing, 
industries tend, therefore, to become established in a 
section where there is a good supply of labor. The New 
England towns have been preeminently of this type. All 
about them we^-e farms which had reached the point of 
exhaustion, and could therefore employ profitably only a 
small part of the rising generation. The surplus labor 
thus created gravitated naturally to the nearest town in 
search of employment, and the early development of 
numerous manufactures was thus made easy. For a 
similar reason there can be no extensive manufacture in 
those parts of the West where the increasing population 

1 The increasing importance of steam power is shown by the following 
figures which give the horse power employed in manufacturing establish- 
ments in the United States in 1870 and in 1900: — 

Water Wheels. Steam Engines. 

1870 1,130,000 ^,346,000 

1900 1,727,000 8,742,000 

10 



146 PRINCIPLES OF ECONOMICS. 

is mostly absorbed in agriculture, which is still incom- 
pletely developed." ^ 

Frequently the influences which have been described 
operate over large areas of country, so that within any 
special ^^ these regions the location of an industry 

Influences. \^ some particular city is often a matter of 
chance. Thus the shoe industry might have grown up 
in Dorchester or Watertown, instead of Lynn, if John 
Adams Dagyr, a skillful shoemaker who had emigrated 
from Wales, had happened to settle at either of the 
former places rather than at the latter. At Lynn, how- 
ever, Dagyr began to teach apprentices how to make fine 
shoes ; and before long the town had established its 
superiority in this industry. The same thing is true of 
the growth of collar and cuff manufacturing at Troy 
rather than at the neighboring city of Cohoes'; of the fur- 
hat industry of Danbury and Newark ; of the hosiery and 
knit-goods factories located at Cohoes rather than at 
some other place possessing good water power, and of the 
pottery establishments of Trenton, New Jersey, and East 
Liverpool, Ohio. 

§ 85. When a good start has once been made, an 
industry tends to increase at its original seat, and does 
not readily migrate although superior natural ^^^^^^ggg 

facilities might be found elsewhere. Thus ofanestab- 

.„ XI X i. lished center. 

Massachusetts still surpasses any other state 

in the production of cotton goods, even though the 

1 This tendency is not equally marked for all industries. In the 
manufacture of clothing 95 to 100 per cent of all the establishments 
are in the larger cities, where a large amount of unskilled labor can 
be obtained at low wages. Leather goods, printing and publishing, shirt 
making, and meat packing, for various reasons, also gravitate to the cities. 



LOCALIZATION OF INDUSTRY. 147 

southern mills are much nearer the raw materials and 
utilize labor which is paid less and can be worked longer 
each day; while Trenton and East Liverpool lead all 
other towns engaged in the pottery industry although 
the fine clay that they now use has to be transported 
from distant places. Mere inertia explains this curious 
fact to some extent, but it is to be accounted for chiefly 
upon rational grounds. The established center of any 
industry soon acquires a prestige which both strength- 
ens its control of the markets and attracts supplies 
of labor and capital. Especially do skilled workmen 
migrate to the principal market for their labor, and 
their children are brought up to the trade, so that the 
local supply of specialized skill is perpetuated. Con- 
tact between large numbers of producers, both employers 
and skilled employees, stimulates a careful study of the 
industry, and favors the discovery and general introduc- 
tion of new methods and appliances. Generally subsidi- 
ary industries which supply the particular tools and 
materials required grow up around their chief market. 
Finally the principal industry tends to become subdi- 
vided into specialized branches, a condition which is 
highly favorable to the minute study and further im- 
provement of the various parts. All of these reasons 
make it clear that something besides inertia is responsi- 
ble for the persistency with which industries cling to 
their established centers. 

At this point the natural inquiry arises : Why is it 
that, since the advantages of an established center are 
cumulative, each industry is not wholly concentrated at 



148 PRINCIPLES OF ECONOMICS. 

a single place ? It appears, however, that there are 
,, , , arood reasons for the failure of a favored 

Limitation ° 

to such locality to draw to itself the whole of any 

branch of production. In the first place 
local supplies of raw materials become more scarce and 
expensive as the number of consumers multiplies, and 
eventually these things have to be brought from a dis- 
tance, so that the advantage originally enjoyed tends 
gradually to diminish or even disappear^ The same 
thing also occurs with water power, which rapidly rises 
in price as the demand increases. Besides, the increased 
output obliges producers to seek wider markets, and this 
mean^ that a search must be instituted for distant cus- 
tomers. Every locality has a natural market which it 
can supply at a lower cost for transportation and for 
drumming up trade than any other. But the expense of 
securing trade and transporting the products gradually 
increases as distant markets are reached, so that in the 
end we usually find some limit to the concentration of 
production in a single locality. 



LITEEATURE ON CHAPTER V. 

General References : Andrews, Institutes of Economics, 31- 
82 ; Bohm-Bawerk, Positive Theory of Capital, 1-125 ; Cannan, 
Elementary Political Economy, 3-25; Ely, Outline of Economics, 
89-117; GiDE, Political Economy, 96-168; Hearn, Plutology, 
24-229, 291-331, 382-423; Laveleye, Political Economy, 30-130; 
Marshall, Principles of Economics, 214-400 ; Mill, Principles of 
Political Economy, Bk. I. ; Newcomb, Political Economy, 70-144 ; 
RoscHER, I. 119-285; Smith, Wealth of Nations, Bk. I., Chaps. 1, 
2, 3, Bk. II., Chaps. 1, 2, 3; Walker, Political Economy, 33-77. 



« 



ORGANIZATION OF THE FACTORS. 149 



CHAPTER VI. 

THE PRODUCTION OP WEALTH. 

{Continued.) 

I. Organization of the Factors of Production. 

§ 86. A Robinson Crusoe may apply labor and capital 
to land, and may carry on a purely isolated process of 
production. But in economic society the production a 
production of wealth is a social process ; and social process, 
we have next to consider the social organization of the 
three productive factors, land, labor, and capital. We 
shall find that production requires the cooperation of the 
individuals that compose any economic society ; and that 
it is a cooperative, therefore a social, process. 

The most simple form of cooperative or associated 
production is seen in the association of a number of per- 
sons to produce a result which the efforts of gj^pig ^sso- 
a single individual could accomplish less ciated effort, 
easily, or perhaps could not accomplish at all. When 
all the men in a community join in raising the frame of 
a house, or in harvesting a field of corn, we have an in- 
stance of simple associated production. a 

§ 87. The division of occupations is a second form of 
cooperative production. This occurs with- Division of 
in a family when the men attend to outdoor '^^^^p^^®^- 
work, and the women to indoor work. Or it takes place 



150 PRINCIPLES OF ECONOMICS, 

vritliin a community when certain men devote themselves 
mainly or exclusively to the trade of the smith, the car- 
penter, or the shoemaker, and perform all such work 
for the other members of the society. 

§ 88. A third and more complicated form of associa- 
tion is seen in what is technically called the division of 

Division labor. By this is meant the division of the 

of labor. process of producing a commodity into a 
number of small parts. Each laborer is intrusted witli 
the performance of some one or two parts of the process. 
in this way the manufacture of a pair of shoes, a sewing 
machine, a watch, or a needle, may be divided into fifty 
or one hundred separate processes. The division of 
labor has been carried so far in the modern factory 
that any reader is able to find for himself many illus- 
trations of this minute subdivision of the work of 
production. 

The introduction of the division of labor has had many 
beneficial effects, -which have been discussed by all econ- 
omists since the time of Adam Smith. .It 
Advantages 

ofthedivi- assigns to each laborer a single process 
which he is called upon to repeat day after 
day until he acquires great skill and dexterity in his 
work. It saves time which would be lost if the work- 
man should be compelled constantly to change from one 
process to another. It enables almost every one to find 
some work which he is able to do, although he may suffer 
from some physical disability. Finally, it reduces pro- 
duction to a series of comparatively simple processes, 
which can be easily studied and often improved. In this 



ORGANIZATION OF THE FACTORS. 151 

way invention has been greatly stimulated, most inven- 
tions taking the form of greater or smaller improvements 
upon details of the productive process. 

Yet certain disadvantages are sometimes found to 
grow out of the division of labor. The workman who is 
confined to a single process often finds his 

TT 1 1 Disadvantages 

work exceedmgly monotonous. Unless he of the division 

cultivates other interests, his faculties are **^^^*°^' 
likely to become narrowed, and he is likely to be less 
intelligent. Again, the division of labor confines work- 
men to a few routine operations. Then, if thrown out 
of the accustomed branch of employment, they often find 
difficulty in learning another trade. Finally, the employ- 
ment of women and children in many lines of industry 
has been made possible by the division of labor. Women 
and children are able to operate many kinds of machin- 
ery, and have often displaced men. In factory towns it 
has happened that fathers have been thrown out of work, 
while wives and children have taken tlieir places at the 
mills. The division of labor has been found an indis- 
pensable condition for the progress of modern industry. 
A wise policy will seek to diminish all the disadvantages 
which may arise from it, while retaining its great bene- 
fits. Opportunities for education and recreation will 
counteract whatever monotony of occupation the division 
of labor produces. The labor of women and children 
may be abolished in certain cases where it is especially 
detrimental to the health of the workers or to the welfare 
of the family, while in other cases it may be permitted 
under adequate restrictions. 



152 PRINCIPLES OF ECONOMICS. 

§ 89. The exchange of products underlies the last two 
forms of associated production. The division of occupa- 
Exchangeof ^ions cannot take place unless the smith, the 
products. farmer, the carpenter, and the shoemaker 
devise some method of exchanging the products of their 
respective labors. The division of labor cannot be carried 
very far until there is an organized system of markets. 
In these markets merchants brmg together the products 
of all branches of industry in such a way as to enable 
the men who produce large quantities of various small 
commodities to find a market for their wares. Modern 
industry, therefore, is based upon the fact that each man 
produces large quantities of salable commodities which 
he himself could never consume, and then depends upon 
other producers to furnish him with supplies of consum- 
ers' goods suited to his wants. This interdependence of 
all producers upon the markets where they sell their prod- 
ucts or purchase their supplies has been carried farthest 
in those industries which have become localized in a few 
regions. The people of England draw food and raw 
materials from almost all quarters of the earth, and 
depend upon distant markets for the sale of their manu- 
factured products. In the United States the manufacture 
of textiles is concentrated in New England, New York, 
New Jerseyj and Pennsylvania; while these states de- 
pend upon the South or the West for their raw materials 
and breadstuffs. Thus one community is dependent 
upon the products of others, and a territorial division 
of labor is carried out. Such a localizing of industries 
enables each region to devote its labor to those branches 



ORGANIZATION OF THE FACTORS. 153 

of production for which it has the greatest advantages. 
The total production of the world is enormously 
increased by such a localization of production. The 
exchange of products is a part of the process of pro- 
duction, but it requires detailed treatment in a subsequent 
chapter. 

§ 90. A fifth form of associated production is seen in 
the cooperation of the factors of production. The per- 
sons who control the supplies of land, of 

^ ^ Cooperation of 

labor, and of capital must cooperate in the the productive 
establishment of business undertakings or 
enterprises. Sometimes it happens that one man may 
own both land and capital, and may perform all the 
necessary labor of production. This is the simplest way 
to secure the cooperation of the three factors of produc- 
tion, and is very common in the United States, where so 
many farmers cultivate their own land with their own 
capital and labor. On the plantations of the South 
another form of organization formerly existed. The 
planters owned their land and capital, and also owned 
the laborers. In both of these cases the cooperation of 
the productive factors is secured by simple methods, but 
the organization of business enterprises is often much 
more complex. 

Such a complex form of business organization is re- 
quired whenever separate classes of persons control the 

supplies of labor, of land, and of capital re- 

, ^ ^ Complex 

quired for the establishment of an industrial organization. 

enterprise. At the present day we have a ^^^^^y^- 
large class of persons who supply labor but nothing else. 



154 PRINCIPLES OF ECONOMICS. 

Another class supplies capital, while land may be supv 
plied by still a third class, the landlords. The work of 
securing the cooperation of laborers, capitalists, and land- 
lords has fallen to a class of employers or undertakers 
of business enterprises.^ The employer, or undertaker, 
has become a person of the greatest economic impor- 
tance. He is constantly seeking for favorable opportu- 
nities to establish business enterprises, he assumes the 
responsibility of investing capital and hiring land, while 
he employs and superintends the work of a number of 
laborers. On his good judgment and business ability the 
efficiency of the productive process mainly depends. His 
function is altogether distinct from that of the capitalist, 
the landlord, or the laborer. They may cooperate in 
establishing the enterprise, but upon the employer the 
responsibility of undertaking and conducting the busi- 
ness primarily depends. The entrepreneur may own the 
land upon which the enterprise is established, he may 
contribute a part or all of the capital used in production, 
he may even labor with his own hands ; but his function 
as entrepreneur is wholly distinct from his functions as 
landlord, capitalist, or laborer. We shall next study the 
various forms of business undertakings, or the various 
metliods in which entrepreneurs exercise their functions 
hi establishing and managing productive enterprises. 

§ 91. Entrepreneurs may secure the cooperation of 
land, labor, and capital, by the following methods': — 

1 The word " undertaker " originally meant a man who organized and 
managed a business on his own responsibility. In place of '•' undertaker " 
the French word entrepreneur has been commonly used. 



ORGANIZATION OF THE FACTORS. 155 

1. The single entrepreneur system. In this a single 
employer, contributing all of the capital or 
borrowing a part, owning or hiring the land business un- 
used, and employing a sufficient number of ^ "^^* 
laborers, establishes and conducts a business on his 
individual responsibility. 

2. Next comes the common business partnership. 
Two or more men divide the work of business man- 
agement, and jointly assume the risks incident thereto. 
This form of undertaking is advantageous when the 
business requires more capital than any partner alone 
could have contributed, or when the cares of manage- 
ment need to be divided. The partners agree to divide 
profits or losses in certain proportions, and are jointly 
and severally liable for all the debts of the firm to the 
extent of their entire fortunes. 

3. A third form of undertaking is the modern busi- 
ness corporation. The older corporations were formed 
generally by a number of persons who were empowered 
by law to act as an individual for certain purposes, and 
to maintain a continued existence, beyond the life of 
the actual associates, by providing for a succession of 
members. A church, a university, or a charitable insti- 
tution can best be organized in this way. Such a corpo- 
ration is in the eyes of the law an artificial person. 
Its charter of incorporation confers upon it certain spe- 
cific powers, and within these limitations the members 
of the corporation act as one person. Thus they may 
acquire or 'sell property, may sue and be sued. Beyond 
the specific powers conferred by its charter, however, no 



156 PRINCIPLES OF ECONOMICS, 

corporation has a right to go. Such an action would be 
declared by the courts to be ultra vires, that is, beyond 
the powers conferred upon the corporation. Moreover, 
the charter might be declared to be forfeited on account 
of such a violation. The modern business corporation is 
regularly a joint-stock company. Its capital is divided 
into shares, often of $100 each, which are transferable 
at the option of each shareholder. Only the owners 
of the shares of the capital stock are members of the 
corporation. Such a joint-stock company is a convenient 
form of business undertaking when a large capital is 
required. Many men may be willing to invest small 
amounts of money in an enterprise in which no one of 
them would wish to risk his entire fortune. Many of 
the earliest joint-stock companies were not incorporated, 
aud were merely a form of partnership. Such com- 
panies have now become the most important kind of 
corporations. They may be formed by a special act of 
legislation, or by complying with a general law author- 
izing groups of persons to form themselves into cor- 
porations, organized for certain purposes, under certain 
conditions. Their charters are either perpetual or lim- 
ited to a term of years. Where corporations are given 
valuable privileges, it is very important that the charters 
should end after terms of thirty or forty years. The 
modern joint-stock company, therefore, is regularly a 
corporation, and has become the most common kind of 
corporate organization. One important feature of such 
business associations distinguishes them in 'a marked 
manner from other forms of business undertaking. The 



ORGANIZATION OF THE FACTORS. 157 

members of joint-stock companies were originally liable 
for the debts of the companies to the full extent of their 
fortunes. In modern times their liability has often been 
limited to the amount of money that they invest in the 
stock of the company. Under this system of limited 
liability, if a thousand persons contribute $100 each to 
form a capital stock for a business corporation, each one 
is liable only to have the $100 contributed by him seized 
for the debts of the business. The stockholders lose, if 
the business is unsuccessful, all the money invested ; 
but they do not risk their entire fortunes by entering 
into such an enterprise. Sometimes the stockholders 
are liable for double the amount of tlieir investment. 
Thus, the stockholders of one of our national banks are 
liable, in case of the failure of the bank, to be assessed 
for a sum equal to the par value of the shares which 
tliey hold. Joint-stock companies with limited liability 
are well adapted to undertake large enterprises, espe- 
cially when there is considerable chance of failure. In- 
dividual employers or partners would seldom take the 
risks which their unlimited liability would compel them 
to assume if they invested their capital in many business 
enterprises. Moreover, as the capital of a joint-stock 
company becomes larger and the number of stockhold- 
ers increases, any single stockholder has little influence 
in the management of the enterprise, and has less 
knowledge of the affairs of the company. It is, there- 
fore, unfair to hold him liable for the debts of the cor- 
poration to the full extent of his fortune. Furthermore, 
the capital needed for many large enterprises cannot be 



158 PRINCIPLES OF ECONOMICS. 

obtained unless the liability of the investors is limited 
to the amount of their investments. During the last 
fifty years the growth of business corporations has been 
marvelous. Enterprises that require large investments 
of capital almost invariably assume corporate form. 
Many simple business partnerships have been converted 
into corporations, partly in order that the partners may 
cease to be liable for firm debts to the full extent of 
their fortunes. Great abuses have undoubtedly attended 
the growth of corporations, but they have been on the 
whole a useful and necessary form of economic organi- 
zation. The great need of the times has been for the 
large capitals required to build railroads, to construct 
huge steamships, and to equip giant factories. This 
need the joint-stock companies have supplied. More- 
over, they have possessed the further merit of making it 
possible to invest small sums in one or more shares of 
corporation stock, so that small savings have been accu- 
mulated in a manner which has made them available 
for the largest enterprises. One more point should be 
noted. Adam Smith, writing in 1776, argued that cor- 
porations could never be managed as efficiently as busi- 
ness partnerships, since the hired managers of corporate 
enterprises controlled, not their own money, but the cap- 
ital of other people. For this reason he argued that 
they would generally be wasteful and negligent. In this 
criticism Smith undoubtedly put his finger upon a real 
difficulty, but a difficulty, nevertheless, which has been 
in large part overcome. Corporations have learned to 
select managers from tried and faithful servants, who 



ORGANIZATION OF THE FACTORS. 159 

have often acquired a professional pride in the success 
of the business. They offer large salaries as rewards 
for efficiency ; while the managers may own stock of 
the company, and thus have a direct interest in the 
business. Yet many corporations incur heavy losses 
through wasteful management, and no remedies have 
been found for many of these cases. 

4. A fourth form of undertaking is seen in what is 
technically called cooperative production. Cooperation, 
in this limited, technical sense, is an effort to dispense 
with the employer, and to leave the management of a 
business to the workmen. Laborers have sometimes 
combined to supply their own capital, and to establish 
business enterprises on their own responsibility. Work- 
men acquire in this way the same interest in the success 
of the undertaking which partners have in the success 
of their business. This often leads them to do more 
and better work, and thus increases the efficiency of the 
organization. On the other hand, the success or failure 
of a modern business depends as much upon able man- 
agement as upon faithful workmanship. Cooperative 
enterprises are usually managed by the workmen them- 
selves, or by committees chosen from their number. 
Such a divided direction has so far proved less effi- 
cient than the business partnership or the corporation, 
in which the management can more easily be concen- 
trated in the hands of one man or a small number 
of men. 

5. A final form of undertaking is the management of 
business by the State. The United States Government 



160 PRINCIPLES OF ECONOMICS. 

manages the postal business, many of our towns own 
their systems of water works, while a few own and man- 
age gas and electric-lighting works. Government en- 
terprise will require discussion in a subsequent chapter. 
§ 92. A sixth form of associated activity underlies all 
the forms of productive enterprise which have been pre- 
viously described, and marks the process of 

Participation 

of the state in production as a distinctly social process. 

pro uc on. rpj^^ importance of the part which the State 
takes in the production of wealth can be most clearly 
shown by an enumeration of some of the cases in which 
governmental activity is exercised. 

1. The State endeavors to protect its citizens against 
external violence. Unless security from external attack 
is assured, life and property are not safe, and the pro- 
ductive resources of a nation cannot be developed. 
England's immunity from invading armies during the 
great Napoleonic wars enabled her to outstrip by fifty 
years' development all her European rivals. 

2. The State aims to maintain order, and to protect 
persons and property from domestic violence. Between 
the thirteenth and eighteenth centuries, the King's peace 
was maintained in England firmly enough to enable her 
wool-raising industry to become the greatest in the 
world. • In the other countries of Europe lawlessness was 
so common as to make it almost impossible for such an 
industry to be carried on. 

3. The State makes possible and regulates the hold- 
ing, exchange, inheritance, and bequest of property. 
The right of property is the right of exclusive disposal 



ORGANIZATION OF THE FACTORS. 161 

over a thing, within certain limits fixed by the laws of 
the State. Many people are inclined to regard it as a 
" natural right," that is, an absolute, inalienable right, 
not to be questioned for any reason whatsoever. As a 
matter of fact, the right of property can be shown to be 
an historical product, gradually developed and constantly 
modified as men have emerged from barbarism to a con- 
dition of civilized life. There was a time in the history 
of all European peoples when practically all possessions 
belonged to the clan or tribe, not to the individual. 
Private property was developed first in the case of per- 
sonal belongings and the products of man's labor. 
Gradually, and within times of which we have historic 
record, the right of private ownership was extended to 
land. The exchange of property between individuals, 
and the rights of inheritance and bequest, have been 
narrowly limited by law, and have varied widely among 
different peoples. In all places property rights have 
been defined, limited, and finally protected by law in 
such a manner as has seemed most expedient. Private 
property has been so long established among us that it 
is easy to commit the error of mistaking it for something 
that has always and necessarily existed, and in its pres- 
ent form. While it has proved, on the whole, a highly 
desirable and useful institution, we must not shut our 
eyes to the facts that it has always been limited by con- 
siderations of social expediency, and that it has often 
been modified. A few instances will show to what ex- 
tent a man's right of disposal over his property is limited 

by law. First^ all property is held subject to the right 

11 



162 PRINCIPLES OF ECONOMICS. 

of the State to take a part of it in the form of taxes. 
Second^ property is limited by the State's right of emi- 
nent domain, under which the State may take property 
for public purposes, compensating the owner for its loss, 
however. Third^ the owner of property may not use it 
in such a manner that it becomes a public nuisance, or 
for a purpose opposed to public policy. Finally^ prop- 
erty may be forfeited to the State, or a portion of it 
taken in the form of fines. In many ways the rights of 
transfer, of bequest, and of inheritance of property are 
clearly defined and limited by law. We are now ready 
to consider the economic importance of private property 
for the production of wealth. It has been found that 
men will not engage in production in any efficient man- 
ner unless they are secure in the enjoyment of the prod- 
ucts of their labor. Through the establishment and 
protection of property rights, the State furnishes men 
with the greatest incentive to diligent effort. Only 
through cooperation of various sorts can production be 
made at all large and copious. The division of labor, 
the exchange of products, and the voluntary cooperation 
of landowners, capitalists, and laborers in forming a 
business undertaking, all presuppose the recognition 
and protection of the property rights of individuals. In 
defining and safe-guarding property rights, the State 
creates the indispensable conditions of all effective 
production. 

4. The State determines the conditions and the man- 
ner of making contracts, and then enforces the faithful 
performance of such agreements. The exchange of prod' 



THE ECONOMIC STAGES. 163 

ucts and the organization of business enterprises by 
landlords, capitalists, employers, and laborers could 
hardly be carried on, and could never have reached 
their present state of development without a strict en- 
forcement of contract agreements between buyers and 
sellers, or between employers, on the one hand, and 
laborers, capitalists, and landowners, on the other. 

5. The State performs many services indispensable 
for the production of wealth, which private individuals 
never would perform in a satisfactory manner. The 
coinage of money, the regulation of weights and meas- 
ures, and the construction of roads, lighthouses, har- 
bor improvements, and ocean and river dikes are a few 
examples of such services. 

II. Stages in the Development of Production. 

§ 93. We can distinguish five stages in the develop- 
ment of the process of wealth-production. 

1. The hunting and fishing stage. In the lowest 
grade of economic development, wealth is producec^ 
mainly by hunting or fishing, by labor of xhefiveeco- 
mere occupation. Little capital is used, ^o™ic stageso 
and it consists of a few simple tools and weapons. 
Famine is of frequent occurrence whenever supplies 
of fish and game become scarce. Population is sparse, 
since much land is required to furnish fish and game 
sufficient to support a single person. Slavery seldom 
or never exists, since slaves could be made useful only 
by putting weapons in their hands, a process dangerous 
to the masters. Fishing tribes, when situated on the 



164 PRINCIPLES OF ECONOMICS. 

shores of navigable waters, may develop into com- 
mercial peoples. The American Indians were mostly 
hunters and fishermen at the time of European colo- 
nization. In pioneering the way for the advance of 
civilization, the European settler often had to adopt the 
same method of securing a living. 

^2. The pastoral stage. The second period of eco- 
nomic development is marked by the fact that men learn 
to rear and domesticate herds of animals, and to depend 
chiefly upon their herds for food and clothing. The 
production of economic goods increases ; and some per- 
sons acquire considerable wealth, which consists mostly 
of sheep and cattle. Slavery appears, and captured ene- 
mies are often employed in the peaceful labor of pas- 
toral industry. Pastoral peoples are usually nomadic, 
wandering around in search of the best pastures. In 
the United States cattle raising has long been a typical 
frontier industry, which gradually makes way for agri- 
culture and manufactures. 

3. The agricultural stage. The next advance is 
made when men learn to raise plants as well as animals. 
More capital is used in production, and the cooperation 
of nature is secured to a much greater extent. When 
the cultivation and improvement of the soil begins, 
people settle down on definite tracts of land, and cease j 
to live a wandering life. Private property in land thenj 
originates. The production of wealth increases, so that] 
a given area of land can support a largely increase( 
population. Slavery often assumes large proportions,] 
since men prefer to impose upon slaves the hard labors! 



THE ECONOMIC STAGES. 165 

of agriculture. Subordinate to agriculture and cattle 
raising, hunting and fishing may be pursued. In agri- 
cultural communities some division of occupations may 
be found, particularly in the case of wood and metal 
workers. 

4. The manufacturing and commercial stage. At 
this point greater attention is given to manufacturing 
into highly finished products the raw materials secured 
by the hunting, fishing, pastoral, agricultural, and min- 
ing industries. This work requires a much larger 
amount of capital, and leads to a separation of trades. 
The division of labor mar also be introduced ; but 
manufactures are carried on mainly by hand, aided 
only by the motive power of animals, wind, and water. 
Commerce now becomes an industry of prime impor- 
tance. When men live by agriculture each community 
is self-sustaining, and requires few commodities pro- 
duced in other places. With the growth of hand trades, 
communities begin to show different capabilities for 
producing various kinds of goods ; certain industries 
become localized in regions that have the greatest ad- 
vantages for producing them; and an exchange of prod- 
ducts begins on a wider scale. The growth of commerce 
leads to the extended use of money to facilitate ex- 
changes, which had previously been carried on by barter. 
At the same time the rise of manufactures and com- 
merce stimulates tlie growth of cities, which now become 
manufacturing and commercial centers. In antiquity 
the most flourishing states of Greece and Italy reached 
the manufacturing and commercial stage. In 1750 the 



166 PRINCIPLES OF ECONOMICS. 

leading countries of Europe were in this period of de* 
velopment, as were also the largest and most populous 
of the English colonies in America. 

5. The industrial stage. This stage was reached in 
the time of the Industrial Revolution. England led the 
way, followed by the United States and various Euro- 
pean countries. It is characterized by the vast increase 
of power manufacture ; first steam, then electricity being 
utilized. Transportation facilities are revolutionized by 
the use of steam, and international commerce rapidly 
increases. Exchanges are effected as much through 
the means of credit as of money. The employment of 
power in manufactures vastly increases the use of capi- 
tal, while business is conducted on a much larger scale. 
Household manufacturing industries are replaced by fac- 
tories ; small factories tend constantly to be replaced 
by gigantic enterprises ; and the business corporation 
becomes the common form of industrial organization.] 
As we are now living in the industrial stage, the remain-.] 
der of this book will be devoted mainly to an explana- 
tion of its characteristics and tendencies. 

III. Freedom in the Establisliment of Productive 
Undertakings. 

§ 94. In modern economic society, employers, capi- 
talists, landlords, and laborers are, to a large extent, 
Freedom of fi'ec to Cooperate in establishing productive 
j^^^'^'^^''*°^ undertakings. In the absence of legal re- 
capitai. straints, labor and capital are freely invested 

in those lines of business which promise the largest 



FREEDOM OF INDUSTRY. 167 

returns. If any profession or trade is not adequately 
supplied, remuneration will be so high as to induce a 
sufficient number of new enterprises to be established to 
meet the demand. On the other hand, when any line of 
business becomes over-supplied, capital and labor will 
sooner or later seek investment elsewhere. In this 
manner the productive forces of society are distributed 
among different branches of production in proportions 
roughly corresponding to the needs of the public. In 
European countries such freedom of investment did not 
exist at the close of the last century. In France, up to 
the Revolution of 1789, governmental restrictions and 
oppressive regulations made by exclusive corporations 
rendered it almost impossible for any save a privileged 
few to carry on manufactures or commerce. In Eng- 
land, until the Industrial Revolution, the investment of 
labor and capital was restricted by guild regulations 
and by laws that hindered the movement of laborers 
from one parish to another. In general, it can be said 
that individual enterprises or business partnerships were 
freed from restrictions earlier than corporate under- 
takings. Until the last forty or fifty years, both in 
England and the United States, corporations were char- 
tered only by special acts of legislation. The bestowal 
of charters became an act of legislative favor or of 
political privilege. Members of one political party often 
found it impossible to secure a corporation charter when 
the other party was in power. A great advance was 
made when general laws were passed making it possi- 
ble for any persons, upon complying with necessary 



168 PRINCIPLES OF ECONOMICS. 

requirements, to associate themselves in a corporation. 
At the present time some of our states allow charters to 
be granted only under general laws, and the tendency is 
everywhere to restrict the granting of special charters. 
Jn a few instances the establishment of productive enter- 
prises is still limited by law. The United States pre- 
vents private parties from engaging in the postal 
business. ' In towns and cities such enterprises as gas. 
electric lights, and water works are carried on either by 
the cities or by private corporations which have received 
exclusive franchises and privileges from the municipal 
governments. 

IV. Cost of Production. 

§ 95. It will be useful for us to make a careful analy- 
sis of the different elements that may enter into the 
cost of production of a commodity. Since 
cost of pro- we are now considering production as a 

^^ ^"' social process, we must analyze the cost to 
society of producing various kinds of wealth. This can 
be done by asking, What does society sacrifice in order 
that the productive process may be carried on? The 
different elements of sacrifice that may enter into the 
social cost of production are : — 

J 1. The destruction of natural agents. Many kinds 
of production may be carried on without appreciably 
lessening the number or usefulness of the natural 
agents that assist the process. A windmill or a water 
wheel may be used in such a manner. But in many 
cases some gifts of nature are consumed during the pro- 



COST OF PRODUCTION, 169 

ductive process, and in such a way that the number or 
usefulness of the available natural agents is lessened. 
This occurs, for instance, whenever coal is consumed in 
generating steam or electricity. The industries of Eng- 
land each year consume a very appreciable portion of 
the coal supply of the country. In agricultural indus- 
try the principal natural agent, land, may be improved 
by careful cultivation ; but in some cases the fertility of 
tlie soil is decreased. In the United States our great 
staple crops of tobacco, cotton, corn, and wheat have 
taken from the soil a far larger amount of the vegetable 
and chemical elements necessary for the growth of plant 
life than has been restored to the land in the form of 
fertilizers. In general we can say that mining indus- 
tries gradually lessen man's available supply of natural 
agents. Agriculture, fisheries, and forestry may be 
rationally conducted in such a manner that our supply 
of natural agents will not be lessened, and may even be 
increased.^ 

2. The destruction of capital. Practically all pro- 
duction necessitates the destruction of a certain amount 
of capital, both fixed and circulating. The cost to 
society of the capital consumed in production is made 
up of two elements, labor and abstinence. When capi- 
tal is consumed, society loses first of all the labor 
expended in producing the materials or tools thus 
destroyed. Second, it should be noticed that absti- 

1 Read Marsh, " The Earth as Modified by Human Action/* for a noble 
plea for economy in the use of all natural agents- See also Jevons, " The 
Coal Question." 



170 PBINCIPLES OF ECONOMICS. 

nence, or waiting, was necessary for the formation of 
the original capital, and will be necessary for its 
replacement. 

3. Labor. Not only is labor required to produce 
capital, but also it must be exerted in using capital 
for the purpose of further production. The social cost 
of labor will depend upon two elements : (a) the charac- 
ter and intensity of the labor, whether intellectual or 
physical, skilled or unskilled ; (h) the length of time 
during which labor is exerted. 

V. Tlie Investment of Labor and Capital upon Land. 

§ 96. In productive industry it is necessary to invest 

labor and capital upon land. Now it is a common fact 

of experience that in certain industries, 

The law of ^ 

diminisMiig agriculture, for instance, much less labor 

and capital can be invested upon each acre 
of land than in other industries, such as manufactures 
and commerce. We have next to investigate this ques- 
tion of the extent to which it is possible to invest labor 
and capital upon a definite tract of land. 

§ 97. First we will consider agricultural industry. At 

any given time every farmer knows that there is a point 

The law of beyond which it will not pay him to invest 

diminishing j^bor and Capital upon each acre of land. 

returns m r r 

agriculture. An investment of five dollars per acre may 
yield a return of twelve bushels of wheat. Possibly- an 
investment of ten dollars might have resulted in a prod- 
uct of twenty-four bushels. But the crop secured from 
a single acre of land cannot, at any given time, be made 



LABOR AND CAPITAL UPON LAND. 



171 



CO double indefinitely by doubling the investment of labor 
and capital. To continue our illustration, suppose that 
fifteen dollars had been invested upon the given acre of 
land instead of ten dollars. Then it is probable that 
the crop would have been increased, but it is not likely 
tliat it would have amounted to thirty-six bushels. Sup- 
pose the investment of fifteen dollars to yield a crop of 
thirty bushels. Then the results of investing the three 
different amounts of capital upon the given acre of land 
would have been as follows : — 



Investment, 


Crop. 


Average Yield to each Dollar 
of Labor and Capital. 


.f5 

110 

115 


12 bushels 
24 bushels 
30 bushels 


2.4 bushels 
2.4 bushels 
2.0 bushels 



It is evident that, on the piece of land in question, an 
investment of fifteen dollars will secure a larger yield 
than an investment of ten dollars ; but that the average 
yield secured by each dollar of labor and capital is less 
than it would have been had the investment been limited 
to ten dollars. It would have been better if the third 
five-dollar investment had been made upon another 
piece of land. This is an illustration of the method in 
which a law of diminishing returns operates in agricul- 
ture. As the investment of labor and capital upon an 
acre of land increases, a point is finally reached beyond 
which an increased investment would yield a larger 
aggregate but a smaller proportionate return. If this 



172 PRINCIPLES OF ECONOMICS. 

were not true, we should continue to raise all our agri- 
cultural produce from a few acres of land, and would 
never have taken the trouble to reduce other fields to a 
condition suitable for cultivation. 

It will be noticed that care was taken to say that the 
law of diminishing returns is true at any given time. In 

any season, when labor and capital are in- 
The effect of . . . 

improvements vested in the cultivation of land, agricul- 

inagnc ^«-^,^pg^] niethods and skill have reached a 
certain stage of advancement, and will not be materi- 
ally changed during that season. They are, therefore, 
relatively fixed ; so that the economist can say that, at 
any given time^ investments of labor and capital can be 
carried only to a certain point before they will begin to 
yield a diminishing return. On the other hand, if we 
compare one season with another, or compare one period 
of years with another, no law of diminishing returns 
may be found to hold true. Scientific agriculture is 
each year making it possible to invest more capital upon 
land without encountering a point of diminishing re- 
turns. Continuing our illustration, we may suppose 
that improved methods of cultivation are originated, 
and that these improvements make it possible to invest 
fifteen dollars upon each acre of land, and to secure an 
average yield of thirty-six bushels per acre. The law 
of diminishing returns, therefore, is true only at a given 
time. At one season it is possible to invest only ten or 
fifteen dollars in cultivating each acre of wheat before 
arriving at a point of diminishing returns. Improved 
methods of farming may, however, after a period of 



LABOR AND CAPITAL UPON LAND. 173 

years make it possible to invest fifteen or twenty dollars 
on each acre, and to secure a proportionately increased 
return. Bearing these considerations in mind, we can 
state the law of diminishing returns as Professor Mar- 
shall has formulated it : " An increase in the capital and 
labor applied in the cultivation of land causes in general 
a less than proportionate increase in the amount of prod- 
uce raised, unless it happens to coincide with an im- 
provement in the arts of agriculture." 

We have seen elsewhere that the population of civi- 
lized countries is increasing, and is likely to increase for 
a considerable time to come. This fact will ^ i- ^• 

Implications 

make it necessary to raise more agricultural of the law of 
products as fast as numbers increase. The returns in ag- 
law of diminishing returns has sometimes ^^ ^^' 
been considered to imply that, when all lands now 
vacant shall have become occupied, men will secure 
increased supplies of agricultural products only by ap- 
plying more and more capital and labor to land that 
will yield a constantly diminishing return. Such a con- 
clusion is wholly unwarranted. From year to year the 
progress of agriculture is making it easier than ever 
before to secure the products of the soil. There is 
reason for thinking that scientific agriculture is only in 
its infancy, and that in the future its progress will be 
much more rapid than in the past. 

§ 98. It is often overlooked that manufactures are 
subject to a law of diminishing returns. If capital is 
constantly invested on a single acre of land, a point is 
finally reached where it will be more profitable to in 



174 PRINCIPLES OF ECONOMICS. 

vest further capital elsewhere. Suppose a factory to 
cover an acre of ground. On each story of the build- 
ing only a certain number of laborers and 
diminSjing ^lachines Can be employed. If the invest- 

returnsin ment of capital is increased, additional 
manufactures. 

stories will have to be added to the building. 
Now there are definite limits to the number of stories 
that can be used economically in a factory building. 
The older factories are four or five stories high, but 
modern factory construction favors one or two story 
buildings. In such a low building it is found that the 
largest return can usually be secured from each dollar 
of invested capital. The expenses for elevators, heavier 
walls, and greater fire risks, combined with the reason 
that the factory can be less conveniently arranged and 
managed, make high buildings less desirable for manu- 
facturing purposes. The law of diminishing returns, 
therefore, applies to manufactures. When a certain 
amount of labor and capital has been invested on a 
single acre of land, a larger return can be secured for 
future investments by placing them on a new piece of 
ground. Manufacturing industries, however, permit a 
much larger investment to be made on each acre of 
land than can be made in agriculture. It is easy to 
invest several hundred thousand dollars upon an acre 
of land devoted to manufacturing industry before the 
point of diminishing returns is reached. In most kinds 
of agricultural industry only a fraction of one per cent of 
this amount can be invested. 

§ 99. In other industries the greatest differences exist 



LABOR AND CAPITAL UPON LAND, 175 

in respect to the amounts of labor and capital that can 
be invested before the point of diminishing Tijeja^of 
returns is reached. Mining is most decid- d imini shing 
edly an industry of diminishing returns.^ other 
As surface deposits are exhausted, shafts ^ ^ ^^' 
must be driven farther into the earth, at greater expense 
and with a rapidly diminishing return. In commercial 
industries very large investments can be made upon 
each acre of land. In cities, buildings that cost several 
million dollars are built upon land that costs hundreds of 
thousands, or even more than a million, dollars per acre. 
Such investments frequently amount to 12,000,000 
per acre. Yet, even here, the point of diminishing 
returns is ultimately reached. The tallest office build- 
ings cannot be raised above a certain height except at a 
rapidly increasing expense. When such buildings are 
placed close together, very large areas have to be left 
vacant in order to secure the necessary amount of air and 
light. At the present time our tall buildings are usu- 
ally isolated, and secure sufficient air and light because 
they tower above neighboring structures. If all the 
office buildings of the business portion of a city should 
be constructed on this plan, large areas would neces- 
sarily be left vacant to serve as air spaces. As the 
height of the buildings increased, the open area would 
have to be larger, and would finally more than counter- 

^ Ultimately, of course, a point of exhaustion is reached. In agricul- 
ture no such condition need he reached, hut land may improve after hun- 
dreds of years of careful cultivation. The law of diminishing returns hag 
nothing to do with the exhaustion of the soil. 



176 PRINCIPLES OF ECONOMICS. 

balance any gain of space secured by constructing addi- 
tional stories. The necessity of providing prompt 
elevator service is another force that tends to the same 
result. The number of elevators must be largely in- 
creased as the height of the building increases. The 
increased room devoted to elevators tends finally to 
counterbaiance the gain of space secured by construct- 
ing higher buildings. 

It appears that a point of diminishing returns is 
reached ultimately in all productive industries located 

upon a given area of ground. Sooner or 
Summary. , , • t ■^ 

later there comes a time when a larger re- 
turn can be secured by investing labor and capital upon 
other tracts. In agriculture the point of diminishing 
returns is reached w\t\\ much smaller investments than 
in manufactures or commerce, but all these industries 
differ merely in the degree to which they admit of an 
intensive investment of labor and capital. Again, the 
law of diminishing returns is true only at a given period 
of time ; and, from year to year, inventions and dis- 
coveries increase the amount of labor and capital that 
can be invested on each acre of land without causing a 
decrease in the return to each unit of investment. 

VI. Large-Scale Production. 

§ 100. During the present century there has been 
a remarkable concentration of productive industry. 
Concentration Formerly the amount of capital and labor 
in production, combined in the average business enter- 
prise was far smaller than it is to-day, while the concen- 



LARGE-SCALE PRODUCTION. 



177 



tration of production in large establishments is more 
marked at the present moment than ever before. 

The census of 1900 presents the following data for 
thirteen leading industries in which the tendency toward 
industrial concentration is particularly strong : 



Industries. 


Average 
Number of 
Employees 
per Estab- 
lishment. 


Average 

Capital per 

Establishment. 


Average 

Product per 

EstabUshment. 


1850. 


1900. 


1850. 


1900, 


1850. 


1900. 


Agricultural Implements 


5 


65 


$2,674 


$220,571 


15,133 


$141,549 


Carpets and Rugs . . 


53 


214 


33,215 


334,205 


46,574 


362,349 


Cotton Goods .... 


84 


287 


68,100 


442,882 


56,553 


321,517 


Glass 


60 


149 


36,195 


173,025 


49,380 


159,267 


Hosiery and Knit Goods 


27 


91 


6,409 


88,882 


12,095 


103,673 


Iron and Steel .... 


53 


333 


46,716 


858,371 


43,650 


1,203,545 


Leather, tanned and fin- 
ished 


4 


40 


3,406 


133,214 


6,500 


156,231 


Liquors, Malt .... 


5 


26 


9,449 


275,205 


13,291 


157,236 


Paper and Wood Pulp . 


15 


65 


16,390 


219,536 


22,996 


166,876 


Shipbuilding .... 


14 


42 


5,638 


69,321 


17,773 


66,826 


Silk and Silk Goods . . 


26 


135 


10,124 


167,872 


27,007 


222,063 


Meat Packing, etc. . . 


18 


61 


18,824 


168,172 


64,766 


696,872 


Woolen Goods .... 


25 


67 


18,036 


120,180 


27,715 


114,425 



From this table it appears that, so far as concerns the 
aggregate investment in a single establishment, the pro- 
cess of concentration is most marked in the iron and 
steel industry ; but that, if the comparative changes since 
1850 are considered, the percentage of increase has been 
greatest in the manufacture of agricultural implements. 



178 PRINCIPLES OF ECONOMICS, 

§ 101. Modern production tends to become concen- 
trated in large establishments for the reason that it 
can be carried on most economically in 

Reasons for -^ 

the growth of that manner. Large-scale production may 

production ,^ c ^^ - 

on a large secure the lollowmg economies : — 
^^^' 1. Economy in fixed capital. Modern 

machinery is expensive, and requires expensive factory 
buildings. Machine production, therefore, necessitates 
a very large outlay for fixed capital ; and this element 
of investment tends to increase each year. The statis- 
tics just presented show that, in the United States, the 
average amount of capital invested in a manufacturing 
establishment was about four and a half times as great 
in 1890 as it was in 1850, while at the same time the 
average number of laborers employed is less than twice 
as large. In the textile industries they show that, while 
the amount of capital invested in the average establish- 
ment has increased to five times the figures for 1850, 
the average number of laborers employed has increased 
less than three times. In the iron and steel industries 
it appears that the average investment of capital is 
nearly four times as large as it was thirty years ago, 
while the average number of employees is only two and 
one half times as large. It is evident, therefore, that 
the cost of fixed capital is an increasing element in the 
cost of production. Now the cost of the fixed capital 
often does not increase proportionately as the product of 
the factory increases. For this reason such costs are 
termed the " fixed charges " of a business, since within 
certain limits they do not vary much, as the amount of 



LARGE-SCALE PRODUCTION. 179 

business is larger or smaller. One large building may 
cost less than two small ones, while it may furnish room 
for the same amount of machinery. Generally a smaller 
^expenditure for engines and other machinery will enable 
one large factory to turn out as large a product as two 
small ones. This is because no machine is needlessly 
duplicated in the large factory, while in the two smaller 
factories some of the machinery may be only half util- 
ized for a considerable portion of the time. This often 
happens when costly machinery is required to perform 
some short operation, and would remain idle much of 
each day in a small factory where tlie product is not 
large enough to keep the machine constantly employed. 
Steam railroads, gas and electric-light works, and street 
railways are the most common illustrations of businesses 
that require very large outlays of fixed capital. In 
these industries one company can, manifestly, supply 
the same territory with very much less unnecessary 
reduplication of tracks, gas pipes, electric wires, etc., 
than two companies would require. But the same thing 
is true, although sometimes to a less extent, of giant 
factories in which hundreds of thousands or even several 
millions of dollars are invested in land, buildings, and 
expensive machinery. In general, it may be said, that 
the larger the outlay of fixed capital, the greater are 
the economies that result from the concentration of 
production in a small number of large establishments. 
If the annual e:5penses for interest and replacement of 
fixed capital are $300,000 in any business, and the 
product is 11,000,000, then the costs of the fixed capital 



180 PRINCIPLES OF ECONOMICS. 

will be thirty cents for each dollar of product. Now if 
the output of the business be increased to 11,500,000 by 
merely utilizing the machinery to the greatest degree 
possible, then the costs of the fixed capital will be only 
twenty cents. 

2. Economy may also be effected in the circulating 
capital. Less coal or lubricating oil may be required in 
one large factory than in two small ones. A large store 
need not have on hand at all times twice the stock of 
finished products that two small stores may require in 
order to enable them to meet any probable demand of 
their customers. 

3. In experimenting with new methods and invent- 
mg new machinery, a large concern has a great advan- 
tage over a small one. Invention and experiment are 
often expensive processes which only a business pos- 
sessed of large capital can afford. Some large concerns 
keep scientists and inventors at work endeavoring to 
improve the processes by which production is carried on. 

4. Large-scale production often results in an econ- 
omy of skill. Labor can be much more efficiently sub- 
divided in a large business undertaking. Out of a great 
number of employees men of exceptional talents can be 
selected for the particular lines of work for which they 
are best fitted. A high specialization of work and a 
greater efficiency in the application of labor can be 
secured in this way. Sometimes an absolute saving 
may be effected in the amount of labor required to do 
the same work. It is said that a steamer of two hun- 
dred or three hundred tons' burden needs one sailor for 



LARGE-SCALE PRODUCTION. 181 

every 19.8 tons of cargo carried, while a steamer of eiglit 
hundred to one thousand tons requires only one sailor 
for each 41.5 tons. In many departments of production 
only a portion of the raw materials can be used for the 
purpose of producing the main products of each business. 
A considerable part of the raw material becomes waste 
unless some means can be found to utilize it. In a large 
business the amount of waste material is very great, and 
the incentive for saving it is correspondingly increased. 
In refining petroleum, material which was formerly 
wasted is now utilized for the production of lubricating 
oil, naphtha, and paraffine. So in the business of beef 
and pork packing, a more complete utilization of every 
part of the animal is effected in large establishments 
than could be secured in any other way. Hides, hoofs, 
horns, bones, blood, bristles, hair, are utilized in the 
production of leather, glue, fertilizers, etc. 

5. Large business establishments can effect savings 
by carrying on for themselves allied or subsidiary proc- 
esses. Large oil refiners make their own barrels, tin 
cans, tanks, pumps, sulphuric acid, etc. Large sugar 
refiners import their own raw sugar, own their own 
wharves and warehouses, and make their own barrels 
and boxes. 

§ 102. But we should not overlook certain very im- 
portant facts which have a tendency to diminish the ad- 
vantages of large over small-scale production, counteract- 

1. In not a few industries a factory of "is forces, 
moderate size will secure the maximum efficiency of both 
buildings and machinery, so that little or no saving of 



182 PRINCIPLES OF ECONOMICS. 

fixed capital is effected by increasing a business beyond 
this point. Professor Marshall mentions cotton spin- 
ning and calico weaving as examples of this sort of 
industries. 

2. Power is sometimes distributed from factory to 
factory from a central engine and boiler house. This is 
often done in the case of steam power, and will be done 
to a still greater extent when electricity comes into more 
general use. Such a device places the small producer 
nearly on a plane of equality with the large so far as the 
cost of power is concerned. 

3. New processes and improved machinery are often 
given publicity at the present day. Trade papers make 
a business of disseminating such information. The most 
improved machinery often can be bought by the small 
as well as by the large producer. 

4. Small establishments of the same sort may often 
be located in the same vicinity. When this happens, 
smaller producers may cooperate to. secure many of the 
advantages which large-scale production gives. They 
may and do combine to own pipe lines, by which crude 
petroleum is carried from the oil fields to distant refin- 
eries ; they may cooperate in collecting and utilizing 
waste products, as the independent oil refiners often do. 

5. Finally, it must be admitted that large business 
establishments often cannot be as carefully superin- 
tended in all their branches as a small business which 
is under the eye of the individual proprietor. There is 
a great deal of truth in Adam Smith's remark that the 
hired superintendent who manages other people's capital 



LARGE-SCALE PRODUCTION. 183 

is generally less watchful and alert than business part- 
ners who manage their own property. 

6. In conclusion, it must not be forgotten that large- 
scale production does not necessarily mean monopoly,— 
that is, the concentration of the production of the entire 
supply of a commodity in the hands of one group of pro- 
ducers. This has often been the result in the case of 
steam and street railways, or of gas and electric-light 
companies ; but in other cases the result has been to 
replace a multitude of small undertakings by a few large 
enterprises. It is sometimes claimed that the economies 
secured by large-scale production are so great that the 
final result will be the concentration of all production in 
the hands of giant monopolies. This is a question which 
will be discussed elsewhere. 

§ 103. The combination of small enterprises into 
large was first noticed in the case of those industries 
which furnish commodities or services that Large produc- 
can be consumed only in immediate con- ^^branche^' 
nection with the business plants. Gas, elec- o^ industry, 
tricity, water, and transportation facilities are examples 
of such goods. Men were not long in finding out that 
one gas company can furnish gas more cheaply than two 
companies can afford to do, and that between two cities 
one railroad can give cheaper and better service than 
two roads. A tendency to large-scale production was 
next noticed in manufactures, wherever large plants or 
large investments of land, buildings, and machinery 
were required. It is possible to concentrate economi- 
cally a great deal of capital upon each acre of land 



184 



PRINCIPLES OF ECONOMICS. 



devoted to manufacture. In agriculture, large-scale 
production has been much less successful. It is 
claimed, with apparent reason, that the largest crop can 
be secured from each piece of land only by studying 
carefully the peculiarities of every acre of soil. Each 
five-acre tract may be best suited for raising a different 
crop. Only on a small farm can a proprietor study with 
sufficient care the varying capability of the soil, and so 
secure the greatest possible product from each acre. In 
the United States the tendency in recent years has been 
to cut large farms up into small ones.^ Yet there have 
been, and are still, some instances of large-scale farm- 
ing carried on successfully with heavy investments of 
capital. 

1 The census of 1900 shows that, since 1880, farms of less than fifty 
acres have increased at the expense of the larger farms : — 



Year. 


Percbktagb of American Farms of Specified Areas. 


1-19 Acres. 


20-49 
Acres. 


50-99 
Acres. 


100^99 
Acres. 


500 Acres 
and over. 


1880 
1890 
1900 


9.8 
9.1 
11.8 


19.5 
19.8 
21.9 


25.8 
24.6 
23.8 


42.3 
44.0 
39.9 


2.6 
2.5 
2.6 



LITERATURE. 185 



LITEEATUEE ON CHAPTEE VI. 

General References as in the last Chapter. 

On the Forms of Business Undertakings : Lalor, Cyclopaedia 
of Political Science, "Corporations;" Johnson's Cyclopedia, 
" Partnership," " Joint-Stock Companies ; " Robinson, Elemen- 
tary Law; Holland, Jurisprudence, 84-85, 288-297, 257, 258; 
Nicholson, Political Economy, 131-137; Hadley, Economics, 
143-146. 

On the Economic Functions of The State : Wilson, The 
State, 637-640; Ely, Outlines of Economics, 257-306; Farrer, 
The State in its Relation to Trade. Upon the right of private 
property, see Holland, Jurisprudence, 175 et seq. ; Robinson, 
Elementary Law, 22-34 ; Mill, Political Economy, Bk. XL, Chaps. 
1 and 2 ; Gide, Political Economy, 430-455 ; Hadley, Economics, 
Chap. 2. 

On the Law of Diminishing Returns : See, besides general 
references. Commons, The Distribution of Wealth, 116-159. 

On Large-scale Production : See, besides general references, 
Hadley, Economics, Chap. 6 ; Hobson, The Evolution of Modern 
Capitalism, 1-142. 



186 PRINCIPLES OF ECONOMICS, 



CHAPTER VII. 

THE THEORY OF EXCHANGE. 

I. Exchange in General. 

§ 104. The process of exchanging products has not 
always been as important and as widely extended as it is 
Development i^ ^^® ^^^^ ^^ ^^^ most advanced modern 
of exchange, nations. Among uncivilized or semi-civil- 
ized peoples, who live in the hunting, the pastoral, or the 
agricultural stages, each family produces all or nearly all, 
the goods which it consumes. Commerce is confined t( 
the exchange of easily transportable articles, which have 
large value in small bulk, such as precious stones and 
metals, ivory, spices, fine fabrics, etc. Prior to the, 
present century, when Europe was in the trades an( 
commerce stage, most of the products of industry werej 
consumed in the places where they were produced ; andj 
bulky or perishable commodities had not become objectsj 
of exchange between distant places. Then began th( 
era of canals, steamships, and steam railroads. This! 
made possible wide-spread exchanges of all products,! 
even the most bulky and perishable. Before the con- 
struction of railways in the United States, most commu-j 
nities that were not situated along navigable water! 
courses were self-sustaining economic units ; and werej 



EXCHANGE. 187 

bound to neighboring communities by few ties of com 
mercial intercourse. 

§ 105, The idea was once common that an exchange 
of j)roducts could profit only one of the two parties 
effecting it, and that what one gained the Advantages 
other must necessarily lose. The falsity of »* exciiamge. 
this view will be made clear by considering the reasons 
why men desire to exchange the products of their labor. 

1. Individuals, communities, and even nations differ 
most widely in tastes and customs. One man or one 
community may prize most highly a commodity wliich 
will possess little value for another person or another 
community. Under such circumstances, an exchange 
will place each commodity where it will have the great- 
est utility. Such an exchange results in an increase of 
utility. 

2. Both individuals and communities have different 
aptitudes for the various kinds of productive labor. 
These differences may be either original or acquired, 
but at any given time they are very marked. Now the 
exchange of products makes it possible for each person 
to devote himself to that line of production for which 
his natural ability or his training best fit him. By doing 
this, both individuals and communities can increase the 
productivity of their labor. 

3. Again, it happens that persons and communities 
have different natural environments. Arable lands, pas- 
ture lands, forests, mineral wealth, sea fisheries, water 
powers, or navigable waters are either not available for 
all communities, or not available in equal degree. By 



188 PRINCIPLES OF ECONOMICS. 

exchanging cotton cloth for wheat, Massachusetts has 
been enriched by the fertile prairies of the West ; while 
Kansas and Iowa have had the benefit of the water 
powers of the New England rivers. To quote from 
Professor de Laveleje, " The poorest workman con- 
sumes the products of two hemispheres. The wool 
for his clothes comes from Australia ; the rice for his 
pudding from the Indies ; the wheat for his bread from 
Illinois ; the petroleum for his lamp from Pennsylvania ; 
his coffee from Java ; the cotton for his wife's dress 
from Egypt or from Alabama ; his knife from Sheffield ; 
the silk of his necktie from France." 

4. In all these cases it is apparent that both parties 
to an exchange may and do profit thereby. It is possi- 
ble, of course, that in many exchanges one person may be 
cheated ; but such is not the case in the majority of the 
exchanges which are effected each day in the world of 
commerce. As a matter of fact, we have seen that the 
exchange of products is a necessary and indispensable 
part of the modern process of wealth production. 

§ 106. An elaborate mechanism has gradually been 
developed for the purpose of facilitating the 
ism of ex- exchange of products. 

change. ^ There has grown up a separate class 

of middlemen, who devote their entire time to the work 
of exchange. 

2. Means of transporting persons and products have 
been developed largely for the purpose of aiding the 
process of exchange. From the caravan to the steam 
railroad, systems of transportation have in view chiefly 



VALUE. 189 

the needs of commerce. Even the post office, the tele, 
graph, and the telephone are used chiefly for this pur- 
pose ; and they have facilitated in a wonderful manner 
the commerce of the world. 

3. Systems of weights and measures were instituted 
bj private individuals, but their importance in the ex- 
change of products is so great that governments have 
assumed the work of regulating them in such a manner 
as to secure greater certainty and uniformity. In time 
a single system of weights and measures is likely to 
prevail in all civilized countries. 

4. Money and credit are institutions called into 
being by the needs of trade. They are so important as 
to require consideration in a separate chapter. 

5. Finally, modern commerce requires a great deal 
of legislation and commercial administration by all the 
governments of the world. Laws relating to debts, to 
bankruptcy, to the regulation of railroads, and to the 
inspection of certain products are instances of this sort. 
Governments maintain consular services in foreign coun- 
tries largely for the purpose of promoting commercial 
interests, while they collect and publish information 
concerning the commerce of the world. 

11. Value. 

§ 107. In the course of trade, commodities exchange 
for each other in certain definite proportions. A bushel 
of wheat may be exchanged for two bushels y^j^g ^^ 
of oats, or two tons of pig iron may be i>"<^®* 
required to purchase one ton of steel rails. When 



190 PRINCIPLES OF ECONOMICS. 

this occurs, wheat is said to be twice as valuable as oats, 
and the value of steel rails is said to be twice as great as 
the value of pig iron. It appears, therefore, that the 
word " value " refers to the proportions in which commodi- 
ties exchange for one another. For this reason it has ; 
often been called " exchange value," and we may define 
it as the power of a commodity to command other com- 
modities in exchange. The value of all kinds of mer- 
chandise is commonly expressed in terms of money. 
We say that wheat is valued at seventy cents a bushel 
and oats are valued at thirty-five. Values thus ex- 
pressed in money are termed prices. Money offers us 
in this way a very convenient method for comparing 
the values of all commodities. Suppose that wheat ex- 
changes for seventy cents in money, oats for thirty-five 
cents, and corn for fifty cents. Then, without making 
comparisons of wheat and oats, or of oats and corn, we 
can determine the relative values of those commodities 
by merely observing what their prices are ; that is, by 
observing in what proportions they exchange for money. 
§ 108. Whenever we say that the price of pig iron is 
for instance, thirteen dollars a ton, we refer to its pric^ 
Befinition of ^^ ^ Certain mari^et, and at a certain time 
a market. Between two different markets there may 
differences in the prices* at which pig iron sells, whil ' 
from one time to another prices may vary widely. But 
it is necessary to have clear ideas of just what consti- 
tutes a market. A market exists when purchasers and 
sellers of a single commodity come together in such 
freedom of intercourse that they establish a single price 



VALUE 191 

at which the commodity exchanges. It is evident, there- 
fore, that each commodity has a separate market ; and 
that we may speak of the iron market, the wheat mar- 
ket, etc., since the dealers in iron and wheat do not 
compete with each other in the establishment of a single 
price for both commodities. In the second place, it will 
be evident that some markets will be far more extended 
than others. Wholesale dealers generally take pains to 
secure knowledge concerning prices not only in one city, 
but in a large extent of territory ; while they are ready 
to place their goods in distant markets whenever a differ- 
ence in prices makes it possible to do so. The result is 
that wholesale markets are often as wide as an entire 
country, and sometimes even international. Europe and 
the United States form almost a single market for such 
a commodity as wheat, since, for instance, the wholesale 
markets of the United States respond quite quickly to 
changes of prices in the English market. Retail dealers. 
on the contrary, seldom compete for custom in distant 
markets, and Rnow far less about the movement of 
prices outside of their immediate neighborhood. The 
result is that retail markets are limited to a single lo- 
cality, sometimes to a portion of a single town or city ; 
while retail prices may vary from one town to another, 
and even from one store to another. 

§ 109, The existence of a market in which the same 
products exchange at a single price generally presup- 
poses the existence of competition. In its 
widest sense, competition denotes a struggle ^°™^^^°°' 
of conflicting interests, in which each person endeavors 



192 PRINCIPLES OF ECONOMICS. 

to accomplish his own ends, or to secure some advan- 
tage to himself, in the face of similar efforts on the 
part of his rivals. In a market, competition may mean 
two things. It may mean the endeavors of rival sellers 
to exchange their goods or services for the money of 
the buyers ; and, on the other hand, the efforts of rival 
buyers to purchase goods or services at the lowest pos- 
sible figure. In the second place, it may mean the proc- 
ess of bargaining between buyers and sellers, in which 
the first set of persons attempts to buy as cheaply as 
possible, while the second endeavors to secure the high- 
est prices that can be obtained. When there are many 
competing sellers and many competing buyers, there is 
little occasion for any bargaining between buyers and 
sellers. In a market, therefore, the first form of compe- 
tition is generally sufficient to establish a single price 
at which commodities sell. Opposed to competition and 
competitive prices are custom and customary prices. 
The force of custom may often prevent a seller from 
charging the full competitive price, or may lead a buyer 
to pay more than a competitive price. Competition may 
also be hindered by combinations of either sellers or 
buyers. When sellers combine and cease to act in 
rivalry, they may charge more than would be possible 
if they should compete. On the other hand, combina- 
tions of buyers may depress prices. 

III. Market Value. 

§ 110. We must consider next the causes that deter- 
mine the value of commodities. In so doing, we shall 



i 



MARKET VALUE. 193 

be obliged to raise a number of difficult questions upon 
which economists have as yet failed to reach a general 
agreement. The subject may be most read- 
ily approached by studying first the prob- of market 
lems of market value. Daring 1895 the 
price of a bushel of wheat in New York varied from 
fifty-six to eighty-three cents, and was seldom the same 
on any two successive days. These changes of price 
form the market fluctuations, and the actual value in 
the market each day is called the market value. An 
investigation of the manner in which these market 
values are determined will show us that they depend 
uponT the forces of demand and supply. 

§ 111. By demand is meant the amount, or the num- 
ber of units, of any commodity that consumers are ready 

to purchase at a s-iven price. In the chapter 

o 1 1 Demand, 

devoted to the consumption of wealth, it was 

shown that the amount of any commodity demanded by 
purchasers in any market will vary according to, (1) the 
marginal utility of the commodity, (2) the price re- 
quired in order to purchase it, (3) the wealth of the 
purchasers. Persons who enter any market as buyers 
commonly sacrifice money in order to secure commodi- 
ties. Knowing the extent of their annual incomes, such 
persons can and do estimate roughly the marginal utility 
which a unit of money, a dollar, has for them. When 
they learn that the price of a commodity is a dollar, 
they can and do compare the marginal utility of the 
commodity with the marginal utility of a dollar. They 
will select, or demand, those goods whose marginal util- 

lo 



194 PRINCIPLES OF ECONOMICS. 

ity most greatly exceeds the marginal utility of the 
money required to purchase them. When the utility 
of any good offered in the market increases, the sur- 
plus of utility over costs is greater, and the demand for 
that good will tend to increase ; and vice-versa. When 
the price of the commodity rises, the surplus of utility 
over costs is smaller, and the demand decreases ; and 
vice-versa. Finally, when the wealth of the purchaser 
increases, the marginal utility of money to him will fall, 
the surplus of utility over costs will rise, and demand 
will increase ; and vice-versa. 

§ 112. The supply of commodities offered in the 
modern market is controlled by producers or middle-j 
men who desire to dispose of their entire 
stocks of goods at the highest prices which 
it may be possible to secure. We must distinguish care- 
fully between the terms " supply " and " stock." The 
stock of goods is the absolute amount or number of com- 
modities at the disposition of the sellers. The supply is 
the amount or number of commodities which the sellers 
will offer for sale at a definite price. The supply will 
generally be larger when prices are high, and will usually 
become smaller as prices fall. The stocks of goods 
controlled by merchants have been produced almost 
solely for the purpose of exchanging them for money, 
and the merchants have no possible use for any con- 
siderable part of such goods as articles of personal 
consumption. 

§ 113. Within any market at any given time prices 
will be fixed at a point where demand and supply will 



MARKET VALUE. 195 

be equalized. Let us suppose that the sellers in a 

wheat market control a stock of 1,000,000 bushels of 

wheat. At a price of eighty cents per bushel, all of 

this stock mio-ht be thrown upon the mar- „ „ . 
° ^ Equalization 

ket, and the supply would be 1,000,000 of demand 
bushels. At a price of seventy cents, only 
800,000 bushels might be offered, since some sellers 
might prefer to hold their stocks, amounting to 200,000 
bushels, for sale at a future time when they believe that 
better prices could be secured. Again, a price of sixty 
cents might bring into the market a supply of only 
600,000 bushels, since a larger number of sellers might 
think it worth while to hold their stocks for sale at a 
future date. On the other hand, let us suppose that 
the buyers will demand 1,000,000 bushels of wheat at a 
price of sixty cents, 800,000 bushels at a price of seventy 
cents, and only 600,000 bushels at a price of eighty 
cents. Then seventy cents is the price that will make 
demand and supply equal, and the market price will be 
fixed at seventy cents for the time. The competition of 
buyers and sellers will make no other result possible. 
If the bidding should raise the price to seventy-one 
cents, the demand would straightway fall off, say to 
780,000 bushels. Then some of the sellers who would 
be willing to sell at seventy cents would find that they 
had lost a chance to sell 20,000 bushels. At the same 
time, the higher price might tempt into the compe- 
tition some of the sellers who had refused to sell for 
seventy cents. This would raise the supply of wheat 
offered for sale, say to 820,000 bushels. It is evident, 



196 PRINCIPLES OF ECONOMICS, 

therefore, that a price of seventy-one cents would de- 
crease the demand and increase the supply. The result 
would be to stimulate competition among the sellers, 
none of whom would want to lose their chances of 
effecting sales, and to cause some of the sellers to lower 
their prices to seventy cents. For similar reasons, the 
bidding could not lower the price to sixty-nine cents. 
At that price the demand would increase to 820,000 
bushels, while the supply would fall to 780,000 bushels. 
Competition among the buyers would at once raise the 
price to seventy cents. 

§ 114. This process of the equalization, through com- 
petition, of supply and demand is illustrated perfectly 
.„ \ ^ .= bv the actual transactions of the Berlin 

Illustration of -^ 

this principle Stock Exchange. In this exchange the 
stock Ex- persons who buy and sell stocks do not 
change. make their bargains directly with each other. 

Each day they submit to a committee their bids for the 
purchase of stocks or their offers of stocks for sale, in 
all cases specifying the prices and the amounts of the 
bids or the offerings. The committee examines all the 
bids, or demands, for securities, and all the offerings, or 
supplies, of securities. Then it establishes a settling 
price which will allow the largest number of exchanges 
to be effected. 

In such an exchange let us suppose that the bids and 
offerings of a certain stock are represented by the fol- 
lowing table : — 



I 



MARKET VALUE. 



197 



Demand. 


Supply. 


Bids. 


Number of 
shares. 


Price. 


Offers. 


Number of 
shares. 


Price. 


1 


10 shares 


$100 


1 


10 shares 


$92 


2 


10 " 


99 


2 


10 ' 




93 


3 


20 " 


98 


3 


10 ' 




94 


4 


20 " 


97 


4 


20 ' 




95 


5 


20 " 


96 


5 


30 * 




96 


6 


30 " 


95 


6 


30 * 




97 


7 


30 « 


94 


7 


30 ' 




98 


8 


40 " 


93 


8 


30 ' 




99 


9 


40 " 


92 


9 


40 ' 




100 


10 


50 " 


91 


10 


40 ' 




101 



Then the committee would settle upon f 96 per share as 
the price which would make possible the larg- ^ assumed 
est number of transactions. At that price ^^^^' 
the first five bidders stand ready to buy a total of eighty 
shares ; v/hile the number of shares offered by the sellers 
is also eighty. A price of |97 would reduce the demand 
to sixty shares, while a price of $95 would reduce the 
number of shares offered to fifty. $96 is the price which 
will equalize demand and supply, and at the same time 
allow the largest number of purchases to be made. 

§ 115. While the demand for any commodity will 
tend to vary inversely as the price at which it is offered, 
various commodities differ very widely in Fluctuations of 
the degree in which the demand for them market values, 
varies as market prices fluctuate.. Certain articles, 
such as cotton and wheat, supply the more necessary 
bodily wants. People buy just about so much of these 
goods each season, without stopping to inquire whether 



198 PRINCIPLES OF ECONOMICS. 

prices are a little higher or a little lower. If the 
prices fall somewhat, consumption cannot be greatly 
increased ; while if prices rise slightly, people will still 
purchase these necessities, and spend less for other 
things. The demand for wheat will not decrease Tery 
rapidly until " famine prices " are reached, while the 
consumption of wheat will not increase very much until 
a very low price is offered. The result is that, when the 
supply of these commodities varies, the change of price 
required to produce a corresponding variation of demand 
is very great. Therefore sharp fluctuations often take 
place in the prices of necessaries before the demand can 
be made equal to the changed supply. On the other 
hand, luxuries and articles of relatively voluntary con- 
sumption do not show such great changes in price when- 
ever the supply changes. If the supply of silk increases, 
a slightly lowered price will stimulate consumption, and 
lead to an increased demand. Similarly, if the supply 
decreases, consumption is quickly checked ; and the 
demand decreases before prices rise very high. 

§ 116. Illustrating the equalization of demand and 
supply, we assumed that the sellers were able to. hold 

back a portion of their stocks of wheat, if 
Forced sales. 

they considered that at a future date they 

would be able to secure a higher price. They were able, 

therefore, to make the supply of wheat as small or as 

large as they might find it for their interest to do. 

Whenever merchants are selling grain, or lumber, or 

iron, they can usually hold back a certain portion or all 

of their stocks ; and on any market day can make the 



MARKET VALUE. 199 

supply offered at any given price larger or smaller. If, 
for instance, there comes a report of a shortage in the 
wheat crop, dealers will probably conclude that the 
visible stocks of wheat are likely to decrease, and that 
the supply offered in the market in the near future will 
probably be smaller than it is at the present time. The 
result will be a prospect of higher prices, and this pros- 
pect will induce dealers to res^erve at least a portion of 
their stocks for future sales. When this happens, the 
present supply of wheat will diminish and prices will 
begin to rise. In many cases, however, merchants are 
unable to hold back any considerable portion of their 
stocks. This is most clearly seen in the case of perish- 
able fruits and vegetables. On a Saturday night a 
merchant may have to dispose of his entire stock at 
whatever price it will bring, or he will have it spoil on 
his hands. Under such conditions he is obliged to make 
a forced sale at any price that will be low enough to 
induce consumers to take the goods off the market.^ 
And this may occur in the case of other than perishable 
goods. It often happens that the supply of a commodity 
is increased so greatly that it cannot be disposed of at 
the former paying prices within a reasonable length of 
time. At other times a business crisis will throw men 
out of employment, and make it impossible for them to 
buy the former quantity of goods at the old prices. 
Here again the supply of some goods becomes excessive 
i-elatively to the demand. In all such cases the exces- 

* Commodities which are likely to become worthless bj reason of 
changes in style or fashion are similar to perishable goods in this respect. 



200 PRINCIPLES OF ECONOMICS. 

sive stock has to be disposed of finally at any price 
which will induce consumers to take it out of the 
market. 

IV. Normal Value. 

§ 117. Although market values are constantly chang- 
ing, an underlying force controls all such fluctuations. 
Normal value Experience shows that an unusually high 
and price. price is iiot likely to be maintained for a 
very long time, and that an exceptionally low price is 
equally unstable. Moreover, if we compare average 
market prices for a considerable period, we shall find 
that the relative values of different commodities remain 
tolerably constant, so long as no important changes 
occur in the character of the demand or in the condi- 
tions of production. Some force sets a limit to the 
fluctuations of the market, and restores prices con- 
stantly to what the business world considers a normal 
level. In other words, there is a certain point around 
which market prices continually play. If prices rise 
above this point or fall below it, some force sooner or 
later operates to restore them to the old level. That 
price around which the market fluctuations play may 
be called the normal price of a commodity ; and, in this 
way, we arrive at the concept of normal value and price. 
It is important to notice that the normal price of a 
commodity is not necessarily identical with the average 
Normal price price. There is no reason why the fluctua- 

not necessarily^- ^^ prices in One direction may not be, 
an average '^ *' ' 

price. during any particular year or series of 

years, much greater and much more frequent than the 



NORMAL VALUE. 201 

fluctuations in the opposite direction. In such a case 
an average of the market prices would be much more 
or much less than the normal price level. 

§ 118. We must next investigate the nature of the 
force which determines the normal point around which 
market prices play. Commodities are pro- r^y^^^^^^^^^^_ 
duced by capitalists and laborers who desire erning normal 
to secure the largest possible returns for 
the sacrifices or costs incurred in the work of produc- 
tion. In the modern business world this return takes 
the form, as a rule, of money secured from the sale 
of the products of industry, since production for one's 
own consumption is relatively unimportant. In so far 
as they have the power of choice^ laborers and capitalists 
alike will endeavor to invest their labor and capital in 
those occupations which offer the largest return for a 
given amount of sacrifice. Here, then, we find a force 
that tends to increase or restrict the supply of goods 
brought into the market, and to affect the movement 
of prices. If two commodities that require the same 
amounts of sacrifice for their production command 
different values in the market, producers will in- 
crease the supply of that commodity which happens at 
the time to be more valuable and offers the larger 
return for a given outlay. This increased supply will 
lower the value of this commodity to the level of the 
other one representing the same expenditure of labor 
and capital. 

The operation of this force which leads men to adjust 
the supply of commodities to the demand may be clearly 



202 PRINCIPLES OF ECONOMICS. 

seen if we imagine a case in which a single producer 
labors to provide for his own wants. Here the margi- 
luustration ^^^ utility of each good for this person's 
andexpia- own consumption would determine the de- 
mand. The producer would then simply 
make an estimate of the sacrifices necessary for the 
attainment of each commodity, and would expend his 
labor and capital in the production of those articles 
which would yield the largest surplus of utility over 
cost. In the modern business world, with its complex 
labor system and complicated industrial organization, 
the truth is not equally obvious. But, even here, the 
same principle must operate. The competition of the 
market fixes market prices, and determines the amount 
of the returns that the producers of different commodi- 
ties may expect to receive. The entrepreneurs who 
control the production of goods constantly estimate the 
labor and capital that must be invested in order to 
secure a given quantity of each product.* They know 
that, out of the total income of the business, laborers 
and owners of capital must receive shares that corres- 
pond to the sacrifices incurred in production ; for these 
persons, as well as the employers, will endeavor to 
secure the largest possible earnings for their invest- 
ments of labor and capital. So far as they have the 
power of choice, entrepreneurs will regulate the output 
of each branch of industry in such a way as to secure 
the greatest return for a given outlay. Large profits in 
any one business are certain to attract new investments 
of labor and capital and to call forth an increased 



II 



■I 



NORMAL VALUE. 203 

supply, while a low rate of profit or the prospect of loss 
will in the long run decrease production. 

§ 119. The competition of the market, by which mer- 
chants determine market prices from day to day, has 
been called " commercial competition." To industrial 
the competition of entrepreneurs or invest- competition, 
ors, who endeavor to regulate production according to 
the demand of the market, the term " industrial com- 
petition " has been applied.^ It is important for us to 
examine the actual processes by which this industrial 
competition operates. In case of the prospect of large 
profits in any industry, many employers engaged in that 
branch of production are stimulated to enlarge or ex- 
tend their existing plants. Then, too, other capitalists 
may be induced to establish new enterprises. In a pro- 
gressive country there exists in every prosperous year a 
mass of accumulated profits that seeks favorable oppor- 
tunities for investment. Sometimes, also, old capital 
can be withdrawn from one line of production, and in- 
vested in another that promises a larger return. On the 
other hand, let us suppose that the market value of a 
certain commodity has fallen to such an extent that 
producers are confronted with the prospect of small 
profits or actual loss. Then employers will begin to 
run their factories only a part of each week, or will 
close their doors and wait for better times. Some of 
them may fail, and thus be forced out of business. A 
few may find it possible to transfer their capital to some 
more profitable enterprise. We shall learn in a subse- 

1 See Hadley, Economics, 87 



204 PRINCIPLES OF ECONOMICS. 

quent section that the cost of producing a commodity 
is seldom exactly the same in any two establishments. 
It follows, therefore, that a slight fall of prices would 
merely force out of business those employers who are 
producing at the greatest cost. In all of these ways the 
supply of any commodity is usually decreased as soon 
as a decline in the market value makes its production 
unprofitable. Whenever producers work only or chiefly 
upon orders, the adjustment of the supply to the needs 
of the market is tolerably exact, and temporary fluctua- 
tions of market values are less likely to occur. 

§ 120. Just as the marginal utility of commodities 

determines the demand, so the cost of production is a 

force that governs the supply that producers 

Analysis of ° 1 1 ^ i 

cost of produc- will be willing to place in the market. We 
must now make a careful analysis of the 
different elements that enter into the cost of production. 
In a previous chapter (§ 95) the process of production 
was considered from the point of view of an entire society 
or community, and we enumerated the sacrifices that 
society is required to make in order that production 
may be carried on. Thus we arrived at the concept of 
the social cost of production. But in studying the 
problem of normal value, it is necessary to adopt an- 
other point of view, and to ascertain what sacrifices are 
incurred by individual producers in their efforts toi 
supply the market. It is the cost of production to indi- 
vidual investors, or the producers' cost, that governs] 
normal values ; and it is this cost that must now be] 
analyzed into its constituent parts. 



NORMAL VALUE. 205 

In order that production may be carried on, the 
materials offered by nature must be appropriated, and 
natural forces must be controlled and applied. Natural agents 
But all these elements are the bounty of ?ot an element 

•^ in producers' 

nature, and they are not factors influencing cost, 
the cost incurred by individual producers. If any of 
these natural agents are monopolized, then the owners 
of the monopoly privileges may exact payments for 
their use, and producers must incur this expense be- 
fore industries can be established. But in such a case, 
we are dealing with an element of monopoly value ; 
whereas the normal values which we are studying 
are determined by competition. The entire problem of 
monopoly values will be discussed in a subsequent chap- 
ter. For the present we are assuming the existence of 
competition ; and, in the absence of monopoly privileges, 
it is evident that natural agents do not form an element 
in producers' costs. Such costs are not incurred until 
producers commence to apply their labor and capital 
in the utilization of the materials and forces of nature. 

The first element in producers' cost is the labor ex- 
pended in production. This may be exerted indirectly 
in the manufacture of the capital needed for Latjoraneie- 
the prosecution of the productive process, mentincost. 
or directly in the application of capital and natural 
agents to the work in hand. In both cases the amount 
of the costs incurred will depend upon : (a) the charac- 
ter and intensity of the labor, whether intellectual or 
physical, skilled or unskilled; and (b) the length of 
time during which the exertion must continue. Some- 



206 PRINCIPLES OF ECONOMICS. 

times certain other circumstances aifect the situation. 
Work that is held in low social esteem may be consid- 
ered to involve an additional element of sacrifice on the 
part of the laborer. The same is true of occupations 
that involve considerable risk of failure or even of per- 
sonal injury. 

The second element in producers' cost is involved in 
the expenditure of capital. Buildings and machinery 

must continually be repaired, and materials 
the second and fuel must be replaced. We have seen 

that the production of all the capital thus 
consumed requires labor, and have assigned a place to 
this element of cost in the previous paragraph. But, as 
has been explained elsewhere (§ 83), the formation and^ 
constant renewal of capital require abstinence, or wait- 
ing, as well as labor. This abstinence, or waiting, con- 
stitutes an independent element of sacrifice, and is a 
second factor in determining producers' costs. Thej 
reader should be reminded at this point that, whilej 
every unit of capital is the result of an abstinence from] 
present enjoyments and a choice of future goods instead] 
of present, the various portions of our actual supply of 
capital represent very different amounts of sacrifice onj 
the part of investors (§83). Millionaires may accumu- 
late large masses of capital far more easily than persons] 
of moderate means can save small amounts, and men 
who are anxious to provide for the future may practise! 
saving with much more ease than people of a less prov-j 
ident disposition. But the modern business world 
requires an enormous mass of capital, and its needs 



NORMAL VALUE. 207 

cannot be supplied by these accumulations that repre- 
sent little actual sacrifice. There is a large class of 
what may be called marginal investors, whose savings 
are needed for the establishment of industrial enter- 
prises, for whom the formation of capital entails very, 
real acts of sacrifice. So long as this continues to be 
the case, every unit of capital will represent to the 
minds of producers a degree of abstinence that corre- 
sponds to the sacrifices experienced by the marginal 
investors ; and abstinence will form a necessary element 
of producers' cost. 

It must be understood that the cost of producing a 
commodity includes more than the expenditure of 

labor and capital on the farm, in the mine, 

mil 1 Latror and 

or at the factory. Tools and materials capital re- 
must often be transported from distant ^si,^^ 
places to the establishment where the products and 

,. , IP -, .. . • -1 effecting sales, 

direct work of production is carried on. 

Then the completed product must be carried to the 
markets where the consumers are to be found. All 
this work of transportation calls for heavy outlays of 
labor and capital. Moreover, it is frequently necessary 
to advertise extensively and to employ travelling sales- 
men in order to dispose of the commodities produced. 
In many cases this work adds greatly to the producers' 
expenditure of labor and capital. 

Some economists have included risk as an independ- 
ent element in producers' cost,^ but an accurate analysis 
does not justify such a view. Risk undoubtedly at- 

^ See Cairnes, Leading Principles of Political Economy, 75. 



208 PRINCIPLES OF ECONOMICS. 

tends the work of production, but it cannot be sepa- 
rated from the labor and abstinence that constitute the 
Risk is not t^o elements that determine cost. First 
a separate eie- j^^ ^g consider the investment of labor. 

ment m pro- 
ducers' cost. We have seen that, if any particular indus- 
try entails unusual risks of failure or of personal in- 
jury, workmen will consider that a given amount of 
labor in this occupation represents a greater sacrifice 
than an equivalent quantity of labor of a different 
kind. This element of risk is inseparably connected 
with laborers' estimates of the sacrifices involved in 
different branches of employment. The same thing 
is true of the investment of capital. In devoting their 
property to the establishment of industrial enterprises, 
capitalists are obliged to assume two classes of risks. 
There may be danger, in the first place, of the destruc- 
tion of the invested capital by fire, explosion, or ship- 
wreck. The result of such losses is simply to increase 
the amount of capital required to produce the goods 
which the market demands, and to make a greater 
amount of labor and abstinence necessary for the 
production of a given quantity of product. Investors 
are able, by means of the device of insurance, to dis- 
tribute actual losses over a large number of insurers ; 
but this does not alter the nature or effect of these 
risks, which are inseparable from an investment of 
capital. In the second place, the investor's prospect 
of finding a remunerative sale for his product may be 
rendered unusually precarious by the character of the 
market or the difficulty of forecasting the probable 



NORMAL VALUE. 209 

demand. In such cases labor and capital are mis- 
applied in the production of commodities that are not 
in demand, and such a waste of resources merely adds 
to the cost of supplying the goods that consumers are 
desirous of purchasing. Thus risks of this class merely 
increase the cost of producing the articles that are 
demanded in markets that prove to be of such a pre- 
carious nature. In all cases risk serves merely to 
increase the labor and abstinence that are necessary 
for the work of production, and it is impossible to find 
here a third and independent element of producers' 
cost. 

§ 121. The problem of normal value is complicated 
by the fact that the costs of production are seldom 
exactly the same in any two establish- Different costs 
ments of the same class. Now does nor- ^^ production, 
mal value depend upon the highest, the lowest, or the 
average cost ? The answer to this question may be 
first stated, and will then require further explanations. 
Normal values vary according to the cost of produc- 
ing the most costly portions of the necessary or cus- 
tomary supply. If in any market the consumers have 
been accustomed to purchase about 1,000,000 bushels 
of wheat, and if they require about that quantity, the 
value of wheat will have to be high enough to make 
it profitable for producers to cultivate the poorest land 
that has to be utilized in order to raise 1,000,000 
bushels. If the value should fall so low as to leave 
an inadequate return for the labor and abstinence 
expended by the cultivators of this poorest land, these 



210 PRINCIPLES OF ECONOMICS. 

producers would cease to raise wheat ; and the supply 
offered in the market would become less than 1,000,000 
bushels. Competition among the consumers, who are 
assumed to need 1,000,000 bushels, would straightway 
raise the value of wheat sufficiently to make it profit- 
able to cultivate these poorest lands. For this reason 
the value of a commodity at any given time must be 
sufficient to compensate those laborers and capitalists 
who produce the most costly portion of the necessary 
or customary supply. This portion may be called tin 
marginal unit of the supply, and we may speak o 
marginal producers. 

The difference between the highest and the lowes 

cost will be greater in some industries than in others 

Extent f ^^^ agriculture or in mining, the amount o: 

possiWe product secured from any tract of land can 

differences ..... 

in cost of not, at any given tmie, be mcreased verj 
production, greatly before the point of diminishing re 
turns is reached (§ 98). When this condition is en 
countered, it is more profitable to invest additiona 
capital upon other land. The result is that, if the neec 
for agricultural produce or for minerals is so great tha 
the best lands or the richest mines cannot supply al 
that the consumers require, then inferior lands an( 
poorer mines must be utilized. If the needs of con-"^ 
sumers increase very greatly, it is possible for a grei 
many different grades of land or mines to be used ii 
production ; and there may be very great differenced 
between the cost of production upon the best land an( 
that incurred upon the poorest. On the other hand, ii 






NORMAL VALUE. 211 

manufactures and commerce larger amounts of capital 
can be invested before the point of diminishing returns 
is reached. The result is that the stock of goods pro- 
duced upon a given piece of land can be greatly 
increased if market conditions make it profitable for 
producers to adopt such a course. For this reason the 
more efficient manufacturing establishments, which pro- 
duce at the lowest cost, are constantly increasing their 
output, and are driving the less productive factories to 
the wall. There is, therefore, less room for a great 
difference between the costs of production in the best 
factories and in the poorest that manage to continue in 
operation. If the inferior establishment produces at a 
very much greater cost, its owner is likely to find that 
better equipped and better operated factories will supply 
the entire demand at prices that make it impossible for 
him to continue in business. For this reason some 
economists have thought that manufacturing industry 
is governed by a different law from that which prevails 
in agriculture and mining, and that the lowest cost of 
production controls the normal value of manufactured 
products. If a long period of time is considered, it is 
undoubtedly true that the most efficient factories set the 
standard to which others must conform. But it is none 
the less true that, at any given point of time, normal 
value must be governed by the cost of production in the 
least efficient establishments that are able to maintain 
themselves in businesso 

§ 122. It has been shown that market values de- 
pend primarily upon the marginal utility which a given 



212 PRINCIPLES OF ECONOMICS. 

quantity of goods has for consumers, and that they 

constantly fluctuate according to temporary changes in 

Tformai demand or supply. It is now evident that 

values market fluctuations are limited, and norma 

depend 

upon a values are determmed by the operation 

oroosSg*^ of the cost of production. Normal value, 
forces. therefore, depends upon a balancing of 

marginal utility, the force that governs demand, against 
the cost of production, the force that controls supply 
and it may be said that a normal value is one that 
will tend to make production equal to consumption. 
Yalue, says Mr. Marshall, " rests, like the keystone 
of an arch, balanced in equilibrium between the con- 
tending pressures of its two opposing sides. The forces 
of demand press on the one side, those of supply on the 
other." 

From the point of view of society it is undoubtedly 
advantageous to have the values of commodities propor- 
. . , , tionate to the outlays of labor and capita 
an adjustment necessary to produce them. If two articles 
costs of represent the same cost of production while 

production. ^^^ ^£ them has a smaller value in the mar- 
ket, it follows that society is securing a product o; 
smaller marginal utility from the labor and capita 
invested in producing the commodity that possesses 
the lower value. Under such circumstances a produd 
of greater utility could be realized by withdrawing some 
capital from the less profitable industry and investing i 
elsewhere. 

The student must be reminded that, in this study o 



NORMAL VALUE. 213 

the theory of value, we have been supposing that buyers 
and sellers, consumers and producers, are conducting their 
business affairs with a fair knowledge of the 

Competition 

demands of the market and the conditions is often 
of production. We have assumed, further- ""^^ 
more, that absolute freedom of competition has prevailed 
in all these transactions. It is needless to say that these 
assumed conditions are seldom, if ever, perfectly realized 
in actual business. Buyers and sellers usually have im- 
perfect knowledge of market conditions, and producers 
are not often able to act with perfect foresight and com- 
plete freedom in the choice of fields for investment. 
Under such circumstances the determination of normal 
values cannot take place with anything like the preci- 
sion for which our theory calls, and actual prices must 
often be the result of haphazard or arbitrary methods of 
procedure. 

Nevertheless we may affirm that our theory of normal 
value possesses the highest theoretical and practical 

importance. It is based upon a study of 

T 1 . „ , . , . Importance 

underlying forces which no economist or oftiieory 

practical man of business can afford to neg- °^^^^®- 
lect. Every entrepreneur, although his foresight may be 
imperfect and his freedom of choice limited, is obliged 
to study most carefully and searchingly the probable 
demand for his products; while the closest attention 
must be devoted to every circumstance that affects the 
cost of production. It follows that, in spite of all hin- 
drances to their full operation, tlie marginal utility and 
cost of production of a commodity are real forces which 



214 



PRINCIPLES OF ECONOMICS. 



constantly exercise a controlling influence upon the de- 
termination of values. Reason and experience furnish 
ample confirmation of this conclusion. 

The practical operation of these great forces that 
govern supply and demand may be advantageously 
lUustrative studied by considering certain important 
facts. facts in the histoiy of the copper and the 

steel industries. Since 1890 the annual production of 
copper has risen from 271,000 to more than 412,000 
tons, an increase of more than fifty per cent. Yet in 
the face of this larger output, the price of copper was 
rather higher at the opening of 1899 than it was nine 
years earlier. This is a most interesting phenomenon, 
and its explanation is to be found in the fact that 
the increased demand for copper for use in our growing 
electrical industries has kept up the marginal utility of 
a greatly increased supply sufficiently to prevent any 
fall in value. In the steel industry, the operation of 
the cost of production may be observed. During tha 
last forty years improved processes of manufacture have 
greatly reduced the expenditure of capital and labor 
required for the conversion of pig iron into steel, and 
this change has caused a corresponding movement in 
the values of the two commodities. In 1860 a ton of 
pig iron was worth from twenty to thirty dollars, and 
steel bars sold at prices that ranged from two hundred 
and fifty to three hundred dollars per ton. In 1896 
pig iron suitable for the manufacture of Bessemer steelj 
sold for about twelve dollars per ton, and steel billets] 
•could be bought for about eighteen dollars. In 1860, 



JSORMAL VALU£J. 215 

therefore, the value of steel was ten or twelve times as 
great as that of the material out of which it was made. 
Since that time a decreased cost of production has 
cheapened steel so greatly that its value is but fifty per 
cent more than that of pig iron. 

V. Exceptions to the Theory of Normal Value. 

§ 123. It is now necessary to consider a number 
of important cases in which values do not conform to 
the laws which have just been explained, custom and 
Custom often tends to deter producers or ^^^^^s. 
consumers from insisting upon exact competitive prices. 
In retail trade particularly this influence is very strong. 
Personal relations existing between buyers and sellers 
frequently prevent competition from fixing values at the 
normal point. 

§ 124. Especial importance must be attached to a 
second class of exceptions. Our theory of value pre- 
supposes the existence of competition, and j-anuresof 
assumes that producers have a practical competition, 
freedom of choice in the investment of their labor and 
capital. These conditions are often enough not ful- 
filled, especially in the case of the laborers. Skilled 
laborers are restricted in their choice of occupations to 
the trades to which they have been trained. The sup- 
ply of such operatives in particular employments may 
become excessive, and competition between the laborers 
may compel men to accept a smaller remuneration than 
equivalent sacrifices would command in another trade. 
Among unskilled workmen nothing is commoner than 



216 PRINCIPLES OF ECONOMICS, 

a lack of perfect freedom in selecting occupations. 
Poverty, which limits freedom of movement in search 
of the best opportunities, ignorance of the localities 
where better conditions may be found, and the concen- 
tration of large masses of unskilled laborers in great 
centres of population, are the usual causes of this 
absence of freedom of choice. In all such cases there 
may arise, and probably will arise, a disproportion 
between the remuneration received by the workman 
and the exertions that he is compelled to undergo. 
Thus it happens that even the most disagreeable forms 
of labor may command the lowest rate of return. 

The existence of such conditions affects the values 
at which commodities exchange. Normal value cannot 
Suchfauures ^^ proportioned exactly to the cost of pro- 
affect value, duction unless producers are able to insist 
upon receiving remunerations that are proportionate to 
the sacrifices incurred. When the men who produce 
any commodity are compelled, by the absence of any 
practical alternative, to accept less than equivalent 
exertions secure in other occupations, the article in 
question may exchange for less than it would otherwise 
have to command in order to insure a continuance of 
the supply. In all such cases we have a failure of per- 
fect competition, and we are compelled to recognize 
that an arbitrary and anomalous element has entered 
into the determination of values. 

§ 125. Taxes are often the cause of a third class of 
exceptions. If taxation affected all industries equally, 
in such a manner, for instance, that five per cent was 



NORMAL VALUE. 217 

added to the cost of placing each unit of product in 

the market, values would not be affected in the least 

by such a burden. But taxes are not levied 

•^ Taxes and 

in any such way, and they often affect the the value of 

rates at which commodities exchange. When ^°™™° 
taxes are imposed upon the production of a few com- 
modities, as upon tobacco, whiskey, and patent medicines 
in the United States, the effect is to increase the out- 
lays that must be incurred by producers of these arti- 
cles, and to raise the prices above the normal point 
fixed by the actual costs of production. This result 
must always follow when taxes fall unequally upon the 
production of commodities, or when they are levied 
exclusively upon certain articles. 

§ 126. Producers are obliged under modern business 
conditions to produce commodities for sale, at a distant 
season, to customers of whom they know Mistakes in 
very little. It is very easy for such pro- production, 
ducers to make mistakes, and to supply the market with 
the wrong kind or the wrong amount of goods. Further- 
more, even if each business man had an exact knowl- 
edge of the probable future demands of his customers, it 
would be impossible for him to know just what supplies 
of goods competing merchants would be likely to bring 
to market. In this respect, producers are said to work 
" at cross purposes," and production is said to be " plan- 
less." Whenever mistakes are made by those who supply 
commodities to distant markets, there is a disturbance 
of the normal relations of demand and supply ; and 
the supply of commodities may be either excessive 



218 PRINCIPLES OF ECONOMICS. 

or deficient. In such cases prices will fluctuate tempo- 
rarily, and will not correspond to the cost of production. 
§ 127. The investment of vast amounts of fixed 
capital in modern industrial enterprises has introduced 
^^ .. . into business a new cause of disturbance of 

The effect of 

large fixed prices. A large fixed capital usually is a 
specialized capital ; and is an investment 
that cannot, without great or even total loss, be with- 
drawn from the particular line of business to which it 
is expressly adapted. Consequently, whenever prices 
fall below a figure which will pay all the costs of 
production and leave a fair profit, the managers of such 
large specialized capitals find themselves in a peculiar 
position. They find it impossible to go out of the 
business without incurring enormous loss. At the same 
time it is difficult to curtail production without incur- 
ring an almost equal loss, a fact which requires further 
explanation. Specialized capital in the form of buildings 
and costly machinery requires constant attention and 
renewal. Oftentimes machinery depreciates very rapidly 
when it is allowed to remain idle. The expenses for 
interest" and replacement of fixed capital continue about 
the same whether an establishment does a large business 
or remains idle. Finally, the salaries of the most valu- 
able, and therefore the most highly paid, employees may 
also be nearly the same, since trained superintendents 
and highly skilled mechanics are not always discharged 
even if business is temporarily suspended. The princi- 
pal *' variable expenses," which will depend upon the 
amount of the product turned out, are the expenses for 



NORMAL VALUE. 219 

the less valuable kinds of labor and the expenses for 
materials. The result is that when prices fall below a 
point at which thej yield a fair profit to the producer, 
the managers of very large establishments will not 
promptly reduce the product which they turn out. They 
know that the fixed expenses of their establishments 
will not be greatly decreased by running for shorter 
hours or by temporai'ily suspending production. Each 
manager will be likely to calculate that if he can sell 
his product for anything more than enough to cover 
the cost of materials and of common labor, he will 
have just so much toward paying the fixed charges. If, 
on the other hand, he refuses to produce at the lower 
prices, he will not be earning any part of the fixed 
expenses. Now, if such producers form a combination, 
it is easier for them to agree to stop producing any 
further stock of goods until prices rise. But, without 
such an agreement, each producer will assume that the 
others are going to continue production, and that he 
cannot appreciably diminish the future supply of the 
commodity by decreasing his own output. The result 
is that, wherever large plants exist, a fall of prices will 
not promptly check the output of commodities. Each 
producer may endeavor to secure something towards 
paying his fixed expenses, even if he is obliged to sell 
at a price which little more than covers the cost for 
materials and common labor. Prices may remain below 
the full cost of production for a long time whenever such 
a condition of affairs exists. Professor Hadley^ has 

1 See " Railroad Transportation," 72. 



220 PRINCIPLES OF ECONOMICS. 

called attention to a striking illustration of this fact. 
Between 1870 and 1873 an exceptionally high price for 
pig iron attracted a great deal of capital into that 
industry, and served to increase the annual product 
from 1,900,000 tons to 2,868,000 tons. Then followed 
a rapid fall in the price of pig iron from fifty-three 
dollars to twenty-four dollars, and finally to seventeen 
dollars. But the immense amount of new capital that 
had been specialized in the form of iron furnaces could 
not be as quickly withdrawn. Production remained 
about as large as before, and for several years manufac- 
turers were glad to produce millions of tons of iron for 
anything more than enough to pay for materials and 
common wages. Only after the weaker establishments 
had been bankrupted and forced out of business, did 
production become adjusted to the normal demands of 
the market. It will be noticed that in this instance the 
influence of the cost of production finally operated to 
restrict the supply, but that several years were required 
to produce this result. Prices were restored to a profit- 
able level by a decrease in supply caused by the final 
bankruptcy of the weaker producers. It is possible that 
the policy pursued by managers in such a case as this 
is really a short-sighted one. Longer experience may 
make it evident that, in the end, it will be more profit- 
able for all concerned to restrict production when prices 
fall below a normal point, and to incur the expenses 
entailed by an idle plant. Such a policy would make it 
possible for prices to recover sooner, and this fact might 
compensate for any losses incurred in the item of fixed 



NORMAL VALUE. 221 

expenses. Professor Marshall thinks that trade moral- 
ity is inclined to condemn a man who "spoils a market" 
by continuing to produce for any price that will barely 
cover the expenses for materials and common labor. 

§ 128. We must consider another case in which it is 
difficult to trace the relation between value and costs. 
This occurs in its simplest form when an products and 
industry has one chief product upon which i^y-products. 
efforts are mainly concentrated, but also turns out a by- 
product. Thus cattle may be raised for the purpose of 
securing beef ; but hides, horns, hoofs, and bones may 
be secured as by-products. Similarly, wheat is a main 
product, and straw a by-product; or illuminating gas is 
a principal product, and coke a by-product. Under such 
circumstances how will the values of the main products 
and of the by-products be adjusted ? The general prin- 
ciple is that the combined value of the main product 
and the by-products will approximate the total costs of 
carrying on the business. Now, producers will endeavor 
to regulate the production of joint products in such a 
way that the largest total return can be secured from 
the sale of all the products. Usually this can be done 
by producing all the principal product that can be sold 
at good prices, and then selling the by-products at any 
prices that will induce consumers to take them out of 
the market. If the price of the principal product rises, 
production will be increased, larger stocks of by-products 
will be secured, and their price will usually have to be 
lowered in order to dispose of them. It sometimes 
happens that changed market conditions raise the price 



222 PRINCIPLES OF ECONOMICS. 

of a former by-product so as to make it worth while to 
regulate production according to the price of that prod- 
uct. In all cases, however, the total prices of all 
products will conform to the total costs of the business ; 
while the relative prices of the different products will 
be determined by the relative demand of the market 
for each commodity, in the quantities furnished by the 
business. 

§ 129. In a large business which has many different 

branches it is often difficult to determine exactly what 

are the expenses of each branch. It is 

Difficulty of . ^ 

determining especially difficult to determine the exact 



proportion of the fixed expenses chargeable 
to each branch, and to each different product. Some- 
times this is done in quite an arbitrary manner. Occa- 
sionally some one commodity is used as a means of 
advertising others. It may be sold for less than its 
entire cost, in the hope that new customers may be 
attracted, and the sale of other goods may be increased. 
It is understood that grocers in the United States have 
often used sugar in this manner. 

§ 130. Whenever the supply of a commodity comes 
under the control of a single person or group of persons. 
Monopoly Competition among the sellers is no longer 
value. active in determining prices. Such a power 

to control supply is called a monopoly, and we shall find 
in a subsequent chapter that monopoly values and prices 
differ in important respects from competitive values and 
prices. 



LITERATURE. 223 



LITERATUKE ON CHAPTER VII. 

General References : Andrews, Institutes of Economics, 83- 
117; Ely, Outlines of Economics, 111-139; Gide, Political 
Economy, 169-182; Hadley, Economics, G4-96; Laveleye, 
Elements of Political Economy, 180-188; Macvane, Political 
Economy, 17-34, 86-119; Marshall, Principles of Economics, 
401-565; Roscher, Political Economy, I. 289-339; Walker, 
Political Economy, 78-110. 

Special References: Mill, Principles of Political Economy, 
Bk. III., Chaps. 1-6 ; Cairnes, Leading Principles of Political 
Economy, 11-146. These authors present in best form the older 
theories of value. Smart, Introduction to the Theory of Value ; 
Bohm-Bawerk, Positive Theory of Capital, 129-234; Wieser, 
Natural Value, 3-113 ; Jevons, Theory of Political Economy, 
37-166 ; Clark, Philosophy of Wealth, 70-106. These writers 
present the newer theories of value. 



224 PRINCIPLES OF ECONOMICS. 



CHAPTER yill. 

MONEY. 
I. Development of Metallic Money. 

§ 131. The earliest exchanges were effected by barter. 
Each man exchanged goods which had little utility to 
him for other goods which had more. In 
this direct exchange of one commodity for 
another there are serious disadvantages. A horse can- 
not be bartered for a cow unless each party to the ex- 
change desires to obtain exactly the commodity offered 
by the other. Very often such a coincidence of desires 
does not exist. In the second place, many commodities 
are not divisible into fractional parts. Three hats may 
be exchanged for a coat, but it is impossible to secure 
one hat by bartering a third of a coat for it. Again, if 
one hundred different commodities are continually bar- 
tered for each other, they may exchange in any one of | 
4,950 combinations. Traders must know all of these, 
4,950 market values if they would avoid being cheated. 

§ 132. Gradually men devised a method of avoiding 

these difficulties. They saw that, while some commodities] 

The origin were demanded only upon certain occasions 

of money. Qp under certain conditions, other goods were] 

almost invariably in demand, and were acceptable to 

nearly all persons. Among hunting tribes skins of ani-1 



DEVELOPMENT OF MONEY, 225 

mals were always in demand, since they were the princi- 
pal product of labor, were durable, and useful for many 
purposes. Among pastoral peoples cattle and sheep 
possessed this quality, since they were useful in very 
many ways, and any person could without trouble add 
them to his herds. So, among the American Indians, 
strings of wampum were objects of general desirability, 
since they served to gratify a universal desire for orna- 
ment. When it was found that furs, or cattle, or wam- 
pum, or any other commodity was always in demand, a 
way was opened by which the difficulties of barter could 
be avoided. If a man possessed corn and desired to ex- 
change it for clothing, he need no longer find another 
person who desired to exchange precisely the right kind 
of clothing for the exact amount of corn offered. He 
would find it advantageous to accept furs, or cattle, or 
any universally desirable commodity in payment for his 
corn ; and then he could easily find many persons who 
would be willing to exchange clothing for the furs or 
cattle. As soon as all persons recognize that certain 
commodities are usually in demand and usually ex- 
changeable, then those commodities become a general 
medium of exchange. The exchange of product A for 
product B becomes broken up into two processes : first, 
the sale of A for some universally acceptable medium 
of exchange ; and second, tne purchase of B with this 
medium. In this way the universally acceptable com- 
modity acquires a new and distinct use. Hitherto it was 
valued simply as an object of personal consumption ; now 
it is demanded also as a means of facilitating exchanges. 



226 PRINCIPLES OF ECONOMICS, 

Formerly it was a common commodity : now it is a pecul- 
iar commodity possessing a special function, — namely, 
the function of serving as a general medium of exchange. 
Whenever a commodity acquires this function, it becomes 
money. Historically, money originated in this way. 
Among any people some commodities possess greater ex- 
changeability than others, and the most convenient of 
these finally serve as money. A list of the commodities 
that have in various times and places served as money 
can be indefinitely extended. Besides cattle and furs, 
may be mentioned rice, tea, salt, tobacco, dates, cocoa- 
nuts, grains, cowry shells, and many different metals. 
Traces of such usage still remain in our language. The 
Latin i^ovdi peeunia, money, is ivompecus^ a herd of cattle 
or sheep ; and from it we have derived' our word pecun- 
iary. So, too, the English word/ee has a probable etymo- 
logical connection with the German word Vieh, cattle. 

§ 133. Copper, iron, and zinc, as well as gold and 
silver, have served as money ; but gradually the precious 

metals have displaced the baser. Gold and 
The precious 
metals as silver have become distinctively the money 

metals, while copper has retained a place as 
small change. This predominance of gold and silver has 
come about for the following reasons : — 

1. Their beauty has made them universally desired 
for purposes of ornamentation. Probably this is the pri- 
mary reason why they attained such universal currency 
as commodities. At the present, the amount of gold 
used annually in manufactures and the arts is valued at 
not less than fifty or sixty millions of dollars 



DEVELOPMENT OF MONEY. 227 

2. They are durable, and can be easily distinguished 
from baser metals. 

3. They are difficult to procure, and therefore have 
a high value. Small amounts of them can be exchanged 
for large amounts of most other goods. Hence they are 
portable, and since early times have been able to seek 
distant markets. The cost of producing iron, copper, or 
zinc has so cheapened, on the other hand, that the sup- 
ply has become very large. Hence they have decreased 
in value, so that they are too bulky to serve conveniently 
as money. 

4. They are highly divisible. Both gold and silver 
are divided without loss into small units. With them 
it is easy to make the right payment for any commodity, 
whether of greater or of less value. 

5. They can be converted easily into coins of uniform 
quality and weight. 

6. They have been extremely uniform in value. The 
world's stock of gold money and bars is valued at about 
II 0,000,000,000. This is made up of the accumulations of 
centuries, and the annual product averages only from three 
to four per cent of this amount. Consequently the annual 
product has little influence upon the marginal utility of 
gold. In the case of most other commodities the annual 
product furnishes the greater part of the available stock, 
and the marginal utility will regularly vary with every 
change in the yearly output. People have always been 
able to receive the precious metals in payment for com- 
modities or services, with confidence that the medium of 
payment would remain relatively stable in value for years. 



228 PRINCIPLES OF ECONOMICS. 

Furthermore, the demand for both metals is extremely 
expansive, so that it increases rapidly as their value falls 
This is truer of gold than of silver. 

7. They are uniform in value the world over. 
Possessing high specific value in small bulk, they are 
transported cheaply to any portion of the globe if a 
temporary difference of value makes it profitable to 
do so. 

§ 134. The precious metals circulated at first in the 
form of gold and silver bars, gold dust, and nuggets. 
Coins and They passed by weight, and those who re- 
coinage, ceived them had to provide means for weigh* 
ing them, and sometimes even for testing their genuine- 
ness or purity. So far the development of money was the 
result exclusively of the acts of private individuals seeking 
to facilitate the work of exchange. The disadvantages of 
weighing and testing the money metals were next reme- 
died by coinage. The first step was to stamp a bar, 
or ring, or wire of gold or silver, in order to certify its 
weight and fineness. This has been done commonly by 
governments, but sometimes goldsmiths of recognized 
standing have stamped pieces of gold and silver, which 
have been received without question. Such a certifica- 
tion of the weight and fineness of metal saved exchangers 
from an immense amount of trouble. Improvements in 
the art of coining have led coiners to stamp both sides 
of the coin, and to mill the edges. This prevents clipping 
the coin or otherwise tampering with it, since such 
attempts deface the coin and can be easily detected. 
Moreover, the designs impressed upon coins are made 



DEVELOPMENT OF MONEY. 229 

delicate and intricate in order to make counterfeiting 
difficult. A well-developed coinage makes it possible for 
money to pass by tale, that is, by count ; and exchangers 
no longer need to resort to weighing in order to avoid 
being cheated. Professor Jevons has defined coins as 
" ingots of which the weight and fineness are certified by 
the integrity of designs impressed upon the surface of 
the metal." 

Free coinage of any metal exists whenever any owner 
of bullion has the right to take it to the mints and have 
it coined into money. The United States at Free coinage, 
the present time allows free coinage of ^^^^^^^ 
gold, but the coinage of silver has been re- brassage, 
stricted. Gratuitous coinage is a different thing. The 
work of converting bullion into coins requires a consider- 
able outlay for labor, machinery, etc. In the case of 
larger coins the expense may be less than one third of 
one per cent, while in the case of small coins it may 
amount to three or four per cent. If the government 
makes no charge for coining money, and bears this ex- 
pense itself, coinage is gratuitous. England, since 1666, 
has made no charge for coining money. The United 
States also, except for the period 1853 to 1875, has made 
no cliarge for converting standard bullion into money. 
When coinage is gratuitous, the amount of bullion coined 
into an eagle or a sovereign will equal exactly an eagle 
or a sovereign. If, however, a mint charge is made, 
bullion will be worth just so much less than coins con- 
taining the same weight of pure metal. Most governments 
oblige persons who bring bullion to the mints to bear 



230 PRINCIPLES OF ECONOMICS. 

the expense of coining it into money. Such a charge, 

if it is merely sufficient to cover the expenses of coinage, 

is called brassage. 

Oftentimes governments retain more metal than is 

required to cover the costs of coinage. Such a charge is 

called seigniorage. Until recent times man}^ 
Seigniorage. . 

sovereigns repeatedly debased the money of 

their countries by abstracting a seigniorage of ten, twenty, 
and sometimes eighty or ninety per cent. When this was 
done, the weight of the coins was kept up by increasing 
the amount of alloy. Modern civilized countries usuallj^ 
debase the small coins used for fractional. currency, and 
deduct seigniorage in this way. For instance, since 1853 
the fractional silver coins of the United States have been 
debased. They have been coined exclusively from silver 
bought by the government, and have contained less than 
50, 25, 10, and 5 cents worth of silver, although the gov- 
ernment has paid them out at those values. It is impor- 
tant that the larger coins should not be debased, but such 
a policy is wise in the case of fractional currency. It pre- 
vents people from uselessly melting up these coins, which 
are worth less as bullion than as money. 

Many facts in the history of coinage systems give 
evidence concerning the history of money. Both in 
Origin of coin- ^^^16^^ and in Rome the earliest coins 
age systems, geem to have been stamped with the figures 
of oxen, a fact which probably points to the earlier use 
of cattle as money. In the date country of Persia, 
where dates once served as a medium of exchange, the 
smallest silver coins had the form of a date. The names 



I 



DEVELOPMENT OF MONEY. 231 

of many coins can be traced back to the time when the 
precious metals circulated by weight. The Hebrew 
shekel was a weiglit. The Roman as was originally an 
ingot of copper supposed to weigh an as, or pound. The 
French livrey the Spanish peso and peseta, the English 
pound, the German mark^ were all originally names of 
weights which were used to denote coins. Constant 
debasement by European kings finally reduced these 
coins far below the original weight. These facts make 
it clear that money was a commodity which circulated 
by weight precisely like other commodities. 

§ 135. The notion is still common that money origi- 
nated in some act of government, and is therefore a 
creation of law. Historically there can be Governments 
no doubt that money originated solely by and money, 
acts of individuals, and that governments for a long 
time had nothing to do with the establishment or regu- 
lation of a medium of exchange. At a later date, how- 
ever, the action of governments began to affect the 
institution of money. On the one hand, they instituted 
systems of coinage. On the other, they imposed fines 
payable in money, and received money in payments to 
the public treasury. They selected the commodity 
which had long passed as money between individuals, 
and made it the means of payment in the case of fines 
and public dues. This extended the usefulness of 
money, but did not originate it. The work of coinage 
was left in the hands of private individuals until com- 
paratively recent times. Gradually the need of uni- 
formity and absolute security forced governments to 



232 PRINCIPLES OF ECONOMICS. 

make coinage an exclusively public function, and to pro- 
hibit by severe penalties coinage by private individuals. 

After establishing public systems of coinage, govern- 
ments have taken a further step in developing the insti- 
tution of money. They have declared that 
Legal tender. . n n , • t • <. 

their coms shall be received m payment of 

private debts. In this way, coins are made a legal ten- 
der which must be received in discharge of debts, except 
when persons are allowed in special contracts to agree 
upon some other commodity as a means of payment. 
Thus, in the United States, gold coins, the silver dollar, 
greenbacks (or United States notes), and treasury notes 
are legal tender ; but courts will enforce contracts which 
call for the payment of gold. 

§ 136. Money was originally a mere commodity which, 
on account of its superior desirability and convenience, 
obtained general currency as a medium of 
exchange. Hereby it acquired a new use 
distinct from its other uses as a consumption-good. 
Men began to demand gold and silver, not merely for 
use in manufactures and the arts, but also for a medium 
of exchange. We may therefore speak of a demand 
for the precious metals for employment as money, and 
a demand for them for employment in the arts. Upon 
this combined demand their utility depends. Gold and 
silver were useful and valuable commodities before they 
were ever used as money ; and they would remain valu- 
able commodities even if people should no longer employ 
them as a medium of exchange. Yet their value is 
increased by the money demand for them, and it would 



THE VALUE OF MONEY. 233 

fall if tliej should cease to be demanded as money. At 
a late period in the history of money, the influence 
of governments was felt. Fines and public dues were 
made payable in the commodity which served as money, 
and legal-tender laws enabled it to perform more per- 
fectly its work as a medium of exchange. 

II. The Value of Metallic Money. 

§ 137. Gold and silver as commodities have a certain 

marginal utility which depends upon their usefulness as 

consumption-o-oods. When they are used 

. . . . , . The marginal 

as money, their marginal utility for this use uuutyof 

is simply the utility of the quantity of goods ^^^^^' 
which they will buy. When prices are high, a great 
deal of money is required to purchase commodities ; and 
when prices are low, a large quantity of goods can be 
bought with a little money. The marginal utility of 
money will be high, therefore, when general prices are 
low ; and will be low when general prices are high. 
We must now consider the causes which determine 
whether the purchasing power of money (that is, its 
marginal utility) shall be high or low. 

§ 138. Prices are the values of commodities expressed 
in terms of money. It is possible for commodities as a 
whole to exchange at one time for very dif- 
ferent amounts of money from what they com- the^general 
mand at another. Between 1850 and 1873 i^^^iof 

prices. 

prices rose, from 1873 to 1896 they gradu- 
ally declined, since 1897 they have risen. It is not 
easy to determine whether the general level of prices is 



234 PRINCIPLES OF ECONOMICS. 

rising or falling, because the prices of all commodities 
and services do not move in the same direction at any 
one time. The simplest method of determining varia- 
tions in general prices is the system of index numbers. 
The prices of a large number of commodities are deter- 
mined in some year, and these prices are then called 100 
as a basis of comparison. If one hundred commodities 
should be taken, the index number for the first year 
would be 10,000, that is, the sum of the prices of all the 
commodities. Suppose that at the end of the next year 
it is found that ten commodities have risen, on the 
average, 10 per cent ; that forty commodities have fallen, 
on the average, 10 per cent ; and that fifty commodities I 
remain unchanged in price. Then, by adding the prices 
of all the commodities reduced to this scale of 100, we 
should get 9,700 as the index number for the second 
year. A comparison of the index numbers for the two | 
years shows an average fall in prices amounting to three 
per cent. In order for this method of index numbers to > 
be satisfactorily us^d, a large number of commodities 
must be examined ; and the price of each one should 
be given importance in the final result in proportion to 
the quantity regularly marketed and consumed. Thus 
wheat, corn, and pig iron should be given more weight 
than drugs, spices, and platinum. During the last 
twenty years all methods of computation show a gradual 
decline in prices. 

§ 139. We may explain variations in general prices 
in the following manner. We may regard the amount 
of money in a community as an important factor in 



THE VALUE OF MONEY. 235 

determining the prices that people will be able to pay 

for commodities. In the words of Mr. Mill, " Money 

acts upon prices in no other way than by 

, . , T T . 1 £ T,. Explanatioa 

bemg tendered m exchange tor commodities, of changes 

The demand which influences the prices of "^g^enerai 

^ prices. 

commodities consists of the money offered for 
them." As the amount of money in the hands of con- 
sumers increases, the marginal utility of each piece of 
money will decrease ; the surplus of the marginal utility 
of commodities over the marginal utility of their money 
cost will increase ; and the same number of commodities 
will be in demand at higher prices, or a larger number 
of commodities will be demanded at the same prices. 
On the other hand, we may regard the commodities pro- 
duced for sale in any community as a stock of goods 
which producers desire to exchange for money. These 
commodities, as a rule, have no utility for the producers 
except as they can be sold. Then we can say that the 
demand for money will depend upon the amount of 
goods offered by sellers. Now the ratio at which com- 
modities will exchange for money (that is, the general 
level of prices) will depend upon the conditions of the 
demand for money and the supply of money. This can 
be shown by assuming the following cases: — 

1. Assume that the number of commodities offered 
for sale remains unchanged, but that the amount of 
money in the community is increased, as it was in this 
country after the discovery of the Californian gold 
mines. Then the increased stock of money will tend to 
stimulate the demand for commodities ; and producers 



236 PRINCIPLES OF ECONOMICS. 

will, as a rule, be enabled to sell their stocks of goods 
for higher prices. Conversely, if the mines become 
exhausted, as occurred during the later years of the 
Rqman Empire, and the stock of money decreases by 
gradual waste, then the demand for commodities will 
gradually decline, and a lower level of general prices 
will be the result. It is apparent, therefore, that, when 
the stock of money increases, the purchasing power of 
each piece of money will tend to be less than it formerly 
was. On the other hand, a decrease in the stock of 
money tends to increase the purchasing power of each 
piece. Prices will tend to rise, therefore, when the ; 
stock of money increases ; and they will tend to fall as 
it decreases. 

2. Next we must study the effect of changes in the 
amount of commodities produced for sale. We will 
suppose that the stock of money remains unchanged. 
Now, in a progressive country improvements in produc-, 
tion continually increase the number of commodities 
that can be turned out with a given expenditure of labor 
and capital. Furthermore, every increase of population 
may have a tendency to increase the productive forces 
of a country, and so to increase the production o; 
commodities. If the number of commodities producec 
for sale increases, while the amount of money remains 
the same, producers will have to dispose of a larger 
stock of goods in markets where the general demand foi 
commodities remains unchanged. Competition betweei 
producers will tend to become sharper under such cir- 
cumstances, and commodities will exchange for leg 



THE VALUE OF MONEY, 237 

money than they formerly commanded. This means 
that general prices will be lower. Conversely, if the 
production of commodities is decreased so that fewer 
goods are brought to market, prices will tend to rise. 

3. We conclude, therefore, that prices tend to vary 
directly as the amount of money which consumers take 
to market to exchange for commodities, and that they 
will tend to vary inversely as the number of commod- 
ities which producers bring to market to exchange for 
money. But it is important to notice that both the 
supply of money and the supply of commodities may 
vary at the same time. Thus an increased supply 
of money may coincide with an increased production 
of commodities, or a decreased supply of money may 
coincide with a decreased supply of commodities. In 
such cases one change tends to offset the other. On 
the other hand, a larger supply of money coinciding 
with a smaller supply of commodities, or a smaller 
supply of money coinciding with a larger production of 
commodities, would produce greatly intensified effects. 

§ 140. Of the world's stock of gold and silver, only 
a part is in the form of money. A considerable portion 
exists as bullion or as manufactured com- Bullion and 
moditics. But gold and silver in the form ^o^^ey. 
of bullion or of manufactured goods can be melted up 
readily and converted into money, if free coinage is 
allowed, while gold and silver coin with equal ease can 
be melted into bullion. It follows that the marginal 
utility of the precious metals as money can never be 
very different from their marginal utility as bullion. If 



238 PRINCIPLES OF ECONOMICS. 

a change of fashion or of taste increases the marginal 
utility of bullion, gold or silver coins will be melted up. 
This will continue until the increase in the supply of 
bullion will lead to such a decrease in its marginal 
utility that people no longer care to convert money 
into bullion. On the other hand, if money commands 
more commodities than formerly, bullion will be con- 
verted into coin, and the supply of money will be 
increased. Finally, the existence of a large demand 
for gold and silver in the arts tends to make their value 
stable. If the value of money increases (that is, if 
prices fall), the supply of money will tend to increase 
through the melting up of bullion. Conversely, a fall 
in the value of money (that is, a rise of prices) will 
tend to be checked by a greater use of the precious 
metals in the arts. 

§ 141. General prices depend upon the demand for 
The supply of money and the supply of money. But it is 
money and necessarv to consider all the elements that 

the demand *' 

for money. determine demand and supply. 
1. The number of commodities which producers bring 
to market is not tlie only element that influences the de- 
mand for money. A commodity may be produced by a 
farmer or a manufacturer, then sold to a wholesale dealer, 
then sold by the wholesaler to a retail merchant, then sold 
by the retailer to the person who is to consume it. The 
greater part of the goods produced for sale changes 
hands at least three times in passing from the original 
producers to the consumers. If one thousand commod- 
ities are produced for sale in any community, we may 



THE VALUE OF MONEY. 239 

assume that at least three thousand exchanges will have 
to be effected before these thousand articles reach the 
final consumers. Evidently the demand for money will 
be three times as great as it would be if the goods passed 
directly from the farmer or manufacturer to the con- 
sumer. It appears, then, that the demand for money 
depends upon two factors, (a) the number of commodi- 
ties produced for sale, and (5) the average number of 
times each commodity changes hands on its way from 
producer to consumer. 

2. The supply of money does not depend solely upon 
the number of pieces available for the purchase of com- 
modities. Suppose that one thousand commodities are 
exchanged three times each, so that three thousand 
exchanges are effected. Now one thousand pieces of 
money may suffice to effect all these exchanges, if each 
piece passes from one person to another three times 
during the time that the thousand commodities are 
being exchanged. As a matter of fact, the amount of 
money in any country falls far short of the volume of 
business to be transacted in any season or year. On 
July 1, 1895, the amount of money in circulation among 
the people of the United States was about 11,602,000,000, 
an average amount of $22.93 for each person in the 
country. In the course of the year 1895 each piece 
of money served to effect a considerable number of 
exchanges, so that the total amount of commodities 
exchanged for money vastly exceeded the amount of 
money in the country. Manifestly, $1,600,000,000 cir- 
culating from one person to another on the average one 



240 PRINCIPLES OF ECONOMICS. 

hundred times in the course of a year, will do as much 
money work as $16,000,000,000 each piece of which 
changes hands only ten times during the same period. 
Evidently the supply of money depends upon the two fac- 
tors, (a) the number of pieces of money, (5) the average 
rapidity with which they circulate. It will be well to 
explain clearly what is implied by the phrase " rapidity 
of circulation " when applied to money. If the mem- 
bers of a community are prosperous, they will be able to 
purchase commodities freely. The demand for both con- 
sumers' and producers' goods will be active. Whatever 
incomes consumers receive will be quickly expended for 
consumers' goods ; or will be invested, and so will be 
exchanged for producers' goods. Merchants will find 
their stocks of goods in active demand, and commod- 
ities will pass quickly from producer to consumer. 
Under such circumstances, a given stock of money 
will circulate much more rapidly than when trade is 
dull and people are less prosperous. There are, of 
course, limits beyond which the rapidity with which 
money circulates cannot be increased; and, further- 
more, it will be greater in some communities than in 
others. The rapidity of circulation will regularly be 
great in proportion to the activity, enterprise, and pros- 
perity of each community. 

3. While this statement of the various elements that 
determine the demand for money and the supply of 
money complicates the theory of general prices, the dif- 
ficulty is not so great as it might seem. In the United 
States at any given time, the rapidity with which money 



THE VALUE OF MONEY. 241 

circulates is fixed within quite narrow limits, and it can- 
not change to any great extent. So, also, the average 
number of times that commodities pass from one person 
to another before they reach the final consumer is some- 
thing that is fixed quite definitely at any given time by 
the habits and customs of our people. If tlie number of 
pieces of money in the United States increases, it is safe 
to assume that rapidity of circulation will not vary 
greatly, and that the supply of money will be increased. 
Similarly, if the production of commodities increases, it 
is safe to assume that there will be no considerable 
change in the average number of times that each com- 
modity changes hands ; so that an increase of commodi- 
ties will be practically equivalent to an increase of the 
demand for money. 

§ 142. If we assume the world's stock of the pre- 
cious metals to be fixed, then their values will depend 
simply upon the supplies of gold and silver me cost of 
available for money and for use in the arts, Se precious 
and the demand for both metals. The prob- metais f inauy 

*■ influences 

lem becomes, under such circumstances, their value, 
exactly similar to the problem of market prices. But, 
as a matter of fact, gold and silver are produced, like 
any other commodities, by men who desire to make a 
profit out of the operation of their mines. If the value 
of money is high, the profits of mining gold and silver 
will be large, and the output will begin to increase. 
Conversely, a low value of money will decrease profits 
and reduce the production of the precious metals. 
Gradually the supply of money will be increased or de* 

16 



242 PRINCIPLES OF ECONOMICS. 

creased as the output from the mines slowly changes. 
Several years may be required before a change in the 
world's output of gold or silver will appreciably affect 
the value of the enormous stock of the precious metals. 
But, in the long run, changes in the production of gold 
and silver will make their value approximate the mar- 
ginal expenses of producing them. 

Let us consider in greater detail the manner in which 
the cost of producing the money metals affects their 
Detailed ex- value. Suppose that prices are' low. Then 
pianations. ^^iq money cost of doing all business will 
tend to decrease, and the expenses of mining gold and 
silver will become smaller. At the same time, the low 
level of general prices means that the purchasing power 
of the money metals is increased. The lower cost of 
production will make mining very profitable, and will 
increase the annual output. Thus a fall of prices tends 
to cause an increase of the supply of the money metals. 
Ultimately the increased supply will lower the value of 
money, and so restore a higher level of prices. Again, 
suppose that an increasing supply of gold or silver, or 
any ather cause, produces a decline in the value of 
money and a rise of prices. Then the higher level of 
prices will increase the expense of doing business, and 
will therefore increase the money cost of mining. The 
lower value of money will gradually cause a decrease in 
the production of gold and silver. This takes place in 
the following way. Some mines are much richer than 
others, and from them gold can be produced at a 
smaller expense. When prices rise and the expenses of 



TEE VALUE OF MONEY, 248 

mining increase, the poorer mines can no longer be 

operated at a profit and will cease to be worked. The 

general level of prices, therefore, will help to determine 

what mines can be operated profitably, and what mines 

cannot be worked. Rising prices will gradually shut off 

the supplies of metals secured from the poorer mines. 

The adjustment of the money metals to the expenses 

of producing them is effected slowly by a 

^ ^ r 1 The value of 

gradual increase or decrease of the supply, money is ad- 

For long periods of years there may be no fectiyto^tte' 

correspondence. But, in the long: run, the costofpro- 

^ ^ ' duction. 

cost of producing gold and silver from the 

mines that form the sources of supply will exert an 
influence upon their value. 

§ 143. In applying this theory it should not be for- 
gotten that hitherto the production of the precious 
metals has been conducted in a haphazard . t j ^j. 
manner. By mere accident rich mines tionsofthe 
have been discovered in South America, of gold and 
California, Australia, and South Africa; ^ ^^^' 
and the world's stock of gold and silver has been in- 
creased suddenly without any special reference to the 
existing level of general prices. Yet, even in these 
cases, two things have ever been true : Firsts the 
search for the precious metals is always most active 
when their purchasing power is high. Second^ when- 
ever sudden discoveries of the money metals have in- 
creased the stock of money and raised prices, the poorer 
mines have had to be abandoned ; and in this manner 
production has been checked. At the present time gold 



244 PRINCIPLES OF ECONOMICS. 

and silver are mined in a far more systematic manner 
than ever before, and the principles laid down will oper- 
ate more promptly. The rise in the purchasing power 
of gold during the last twenty years has stimulated gold 
mining in a wonderful manner. Formerly gold was 
produced by crude methods, mainly from rich placer 
deposits or from very rich ores. The placer deposits 
are limited, and have been discovered and worked in a 
very haphazard manner. But within recent years the 
methods of mining gold-bearing ores have been vastly 
improved. Ores which formerly could not be worked at 
a profit are now handled by new methods in such a way 
as to yield very large returns. In the future the busi- 
ness of gold mining will be conducted in anything but a 
haphazard manner. Silver has always been produced 
by a more systematic process of separating it from the 
ores in w^hich it usually occurs. Its production has not 
depended upon the chance discovery of rich surface 
deposits, for it seldom occurs in its native state. In 
recent times the production of gold and silver has been 
quite regular from year to year, increasing or decreasing 
in a gradual manner. For the future, we have a right 
to anticipate a systematic production of both metals in 
such quantities as shall be commercially profitable. 
§ 144. At the opening of tlie Christian Era, large 
amounts of ffold and silver, accumulated bv 

History of the ^ . ' . *' 

production the conquered nations of the lands adjoin- 

siiver. ^ ^^S ^^^® Mediterranean Sea, had been seized 

by the Romans and thrown into circulation 

throughout their empire. A rise of prices hindered 



THE VALUE OF MONEY. 245 

further mining of the precious metals, while wasteful 
methods of operation caused a rapid exhaustion of the 
richest mines. Gradually the production of the precious 
metals ceased, the existing stocks were dissipated, and a 
fall of prices set in throughout the Roman world. From 
the fourth century to the sixteenth there was a positive 
money famine. For several centuries practically no ad- 
ditions were made to the world's stock of gold and silver, 
and the art of mining seemed to be lost. Toward the 
close of the Middle Ages, mining was commenced in 
Austria, Hungary, and Germany ; but prices continued 
at a very low level until some years after the discovery 
of America. After 1545 the Peruvian mines poured a 
flood of silver into Europe, and finally prices began to 
rise at a rapid rate. After 1700 the Brazilian gold mines 
turned out large quantities of gold, while later in the 
same century the Mexican mines began to yield large 
amounts of silver. The combined effects of these dis- 
coveries of gold and silver were to cause. a rise of prices 
of three or four hundred per cent between the years 1600 
and 1800. In 1848 came the discovery of gold in Cali- 
fornia, and three years later the Australian production 
became very large. About 1800 the average annual pro- 
duction of gold was 571,000 ounces. In 1850 it suddenly 
increased to four times that amount. By 1860 it had in- 
creased to nearly 6,500,000 ounces, and prices had begun 
to rise again all over the world. After 1860 the gold 
production gradually declined, but it is probable that 
prices rose at least twenty per cent between 1850 and 
1870. During the decade, 1860 to 1870, the production 



246 PRINCIPLES OF ECONOMICS. 

of silver began to increase, particularly in the United 
States, where the mines of Nevada were being opened. 
Prior to 1860 the world's annual production had never 
equaled 30,000,000 ounces, but between 1871 and 1875 
it averaged 63,000,000 ounces. Since 1875 the silver out- 
put has constantly increased, amounting to 167,727,000 
ounces in 1905. This is more than five times the 
average annual production at any period previous to 
1860. During the last twenty years the world's product 
of gold has largely increased. From 1881 to 1885 the 
average production was 4,794,000 ounces. In 1905 it 
had risen to 18,243,000 ounces. 

§ 145. It will help us to avoid misunderstanding if we 

note that this explanation of the relation of money to 

prices concerns general prices, and explains 

and^pricer©/ ^ <^^i^J ^^^ well-known fact that money will 

individual j^^y more commodities at some times than at 
commodities. "^ 

others. Independently of changes in general 

prices, the prices of wheat, or corn, or iron may rise and 
fall according to the particular conditions of the demand 
for such commodities and the supply of them. When 
general prices are rising, it is possible for the prices of a 
minority of goods to fall, on account of special causes 
affecting their supply and demand ; while, in a period of 
falling prices, some few commodities may remain station- 
ary in price, or may even rise. 

§ 146. Historically the earliest function of money was 

The functions ^^ serve as a medium of exchange. For this 

of money. purpose it originated. But money has come 

to perform other functions. It serves, in the second 



THE VALUE OF MONEY. 247 

place, as a value denominator, a common denominator in 
which the exchange values of other commodities are ex- 
pressed. Not only commodities, but also wages, salaries, 
rents, and all kinds of public and private payments are 
expressed in terms of money. This function is distin- 
guishable from the fii'st function of money. It has hap- 
pened that one kind of money has served as a medium 
of exchange, while another has served as a value denom- 
inator. In the American colonies the values of all com- 
modities and services were expressed in terms of English 
money (that is, in pounds, shillings, and pence), while the 
actual circulating medium was composed almost entirely 
of Spanish, Portuguese, or Dutch coins. Money which 
serves as a value denominator, but not as a medium of 
exchange, is called money of account. Closely connected 
with this second function of money is a third, the func- 
tion of serving as a standard for deferred payments. In 
renting lands, or in agreeing to pay interest and princi- 
pal of mortgages or bonds for a long period of time, per- 
sons are constantly entering into contracts io pay debts 
at future dates. These long-term contracts may extend 
over a period of five, twenty, or even one hundred years. 
In such cases money usually serves as a standard for 
deferred payments. But other commodities havo been 
used. Colleges of the English universities, Oxford and 
Cambridge, have for centuries leased their lands for 
corn rents. These corn rents have varied far less than 
money rents would have varied during the centuries that 
they have been in force. Revolutionary changes in the 
value of money make it an imperfect standard for long- 



248 PRINCIPLES OF ECONOMICS, 

deferred payments. Finally, money performs a fourth 
function, that of serving as a legal tender for all debts. 
Historically, this has been a function which governments 
have conferred upon money at a late stage in its develop- 
ment. The precious metals served as a medium of ex- 
change for centuries before legal-tender laws were even 
thought of, while gold would serve as money at the 
present 4ay even if all legal-tender laws should be re- 
pealed. Silver also would circulate readily in some 
countries without being made a legal tender, but in 
Europe and the United States its use would be consider- 
ably restricted. The wholesale trade of civilized coun- 
tries requires the use of gold. The superior convenience 
of gold for large payments has caused the commercial 
world to show a marked preference for that metal. 
Until 1861 many foreign gold and silver coins, even when 
our government refused to make them legal tender, cir- 
culated in the United States. Certain well known coins, 
such as the English sovereign, have obtained currency 
in many parts of the world where they have not been a 
legal tender. 

III. Debased Money. Gresham's Law. 

§ 147. Governments have often declared various gold 

and silver coins to be full legal tender in payment of 

Debased debts. When this has been done, it has 

money. frequently happened that the legal-tender 

power of two different coins has been made the same, 

while one coin has contained metal of considerably 



DEBASED MONEY, 249 

greater value in the bullion market than the other has 
possessed. For instance, in 1895 the average market 
value of the fine silver in one of our silver dollars was 
about one twentieth of the market value of the gold 
bullion contained in a ten-dollar gold-piece, or eagle. 
In other words, ten silver dollars were given by law the 
same power as the eagle possessed in the matter of pay- 
ing debts ; while the silver bullion contained in them 
had about one half the market value of the gold bullion 
contained in the eagle. Whenever a coin is given a legal- 
tender power greater than the market value of the gold 
or silver bullion which it contains, it becomes a debased 
coin. We liave now to consider the results of giving 
equal legal-tender power to coins that have different 
bullion values. 

§ 148. At any given time a community or a nation 
will need a certain number of pieces of money in order 
to carry on its exchanges at the existing The quantity 
level of prices. Suppose that commodities ^^^^^ 
to the value of 11,000,000 are produced nation needs, 
annually, and that they change hands three times in 
passing from the producers to the consumers. Then 
$3,000,000 of exchanges will need to be effected each 
year. Suppose that the community possesses a stock of 
money amounting to 160,000, and that each dollar cir- 
culates with a rapidity sufficient to cause it to pass from 
one person to another fifty times during each year. Then 
the stock of money will be just sufficient, during the 
course of the year, to effect all the $3,000,000 of ex- 
changes ; and the general level of prices for the year 



250 PRINCIPLES OF ECONOMICS. 

will be one dollar. Now, if the production of com- 
modities remains unchanged, the community will need 
160,000 of money to effect its exchanges at the existing 
level of prices. If the production of commodities de- 
creases, less money will be needed to maintain the 
existing level of prices ; while, if production increases, 
more money will be needed, assuming in both cases that 
all the conditions of exchange remain the same. 

§ 149. Now suppose that the nation's stock of money 

has consisted hitherto of gold dollars, each of which has 

contained 23.22 trains of fine ffold.^ Sup- 

Circulation ° ° ^ 

of debased pose that the government decides to allow 
™°^®^* any person to bring 371.25 grains of fine 

silver ^ to the mints, and to have this quantity of silver 
converted into a coin which is called a dollar. Suppose 
that this silver dollar is allowed by law to have the same 
power to pay debts which the gold dollar possesses, 
while the market value of the bullion contained in each 
silver coin is only one half as great as the value of the 
bullion contained in each gold coin.^ We should then 
have an example of the influence of bad or debased 
money in driving out good money. With other things 

1 This is the weight of the pure contents of the gold dollar, which was 
coined in the United States from 1849 to 1890. It is one tenth of the 
weight of the present eagle. 

2 This is the weight of the pure contents of our silver dollar. 

3 This corresponds closely to the average price of silver bullion for 
1895. The readers will remember that, at any moment, the market value 
of gold or silver bullion will depend upon the supply of either metal and 
the demand for each for money and for use in the arts. In the long run, 
however, the market value of gold and silver bullion will depend upon the 
marginal expenses of production. 



GRESHAM'S LAW. 251 

it often happens that superior commodities drive in- 
ferior out of the market, but with legal-tender money 
the case is different. If the law allows the debtor to 
pay a debt of ten dollars with ten silver dollars whose 
bullion value is only one half the bullion value of a 
ten-dollar gold-piece, many debtors will make payment 
with the cheaper money. As a rule, the dearer money 
will go out of circulation as fast as cheaper money is 
allowed to take its place. Even when coins are not 
actually declared legal tender, the force of custom, or 
the ignorance of many persons concerning the actual 
bullion value of the coins, may serve to give currency 
to the inferior money. It will then tend to displace 
better money precisely as if it had been legal tender. 
Economists call this principle " Gresham's Law," after 
Sir Thomas Gresham, who long ago formulated the 
statement that bad money tends to drive out good, but 
good money cannot drive out bad. 

The operation of Gresham's law does not depend 
necessarily upon the action of the mass of the people 
in picking over various coins in order to se- Manner in 
lect the cheapest for the purpose of paying ^gsham's 
their debts. This is done by money dealers, law operates. 
Goldsmiths select the heaviest and most valuable 
coins for the purpose of melting them up into bullion. 
Bankers and gold brokers constantly pick over gold 
money to secure the heaviest coins for shipments to 
foreign countries. When American gold coins are sent 
to England, they pass as so much gold bullion. Bankers 
who ship bullion naturally select the heaviest coins for 



252 PRINCIPLES OF ECONOMICS. 

paying foreign debts, and turn back into circulation 
those that have been worn lighter by longer use. So 
with the silver dollars in the case which we have 
assumed. They will be used for paying domestic debts, 
while the gold coins, on account of their superior bullion 
value, will be used in paying foreign debts. 

§ 150. But there are limits to the power of inferior 
money to drive out superior. If there is a large amount 
Li "tati ns ^^ silver bullion available for coinage pur- 
tothe poses, and the law allows any amount to be 

Gresham's brought to the mints, a large number of 
^^' silver dollars will be placed in circulation. 

In the bullion market 371.25 grains of silver are worth 
only one half of 23.22 grains of gold ; but the law gives 
to the 371.25-grain silver dollar the same power in 
paying debts that the 23.22-grain gold dollar possesses. 
Under such circumstances the gold dollars will be 
melted up for use in the arts, or will be shipped to 
foreign countries to pay foreign debts. If the silver 
money comes into circulation gradually, the disappear- 
ance of gold will be gradual. But if every one knows 
that an unlimited amount of silver is sure to be put into 
circulation in the near future, a general scramble for 
gold may ensue. Many people will hasten to get as 
many gold dollars as possible while the supply of gold 
in circulation holds out, and the disappearance of gold 
will be rapid. The power of the inferior money to dis- 
place the superior will be limited by the fact that the 
country needs $60,000 of money to effect its exchanges 
at the existing level of prices. If gold dollars disappear 



DEBASED MONEY. 253 

faster than silver dollars can be coined and placed in 
circulation, then the stock of money will become inade- 
quate and the value of money will rise. This rise in 
the purchasing power of money will attract some gold 
dollars back into circulation, and they will remain in 
use until new silver dollars are ready to take their 
places. Assuming that the nation's demand for money 
remains unchanged, and that the rapidity with which 
each dollar circulates is unaltered, then the gold coins 
could not all disappear until 160,000 of silver coins 
should be placed in circulation. If the government 
should limit the coinage of silver to 130,000, then 
130,000 of gold would disappear from circulation, and 
the nation's stock of money would consist of equal 
amounts of gold and silver. On the other hand, if the 
nation is prosperous and progressive, its demand for 
money will increase from year to year as its volume of 
business increases. Suppose it to need each year an 
increase of $2,000 in its money supply in order to trans- 
act its increased business at its old level of prices. 
Then two thousand silver dollars could be placed in cir- 
culation annually without displacing any gold money. 
Finally, if any cause should decrease the amount of 
business transacted in any year, and should decrease the 
nation's demand for money, a certain amount of gold 
would disappear from circulation. 

It is important not to overlook one possible result of 
placing debased money in circulation. The Less demand 
mere threat of a debasement of the cur- for money, 
rency may check business activity and diminish the 



254 PRINCIPLES OF ECONOMICS. 

amount of business transacted. Men will not make 
contracts for the future, and will not be inclined to 
invest capital freely, when they consider it probable 
that money will be debased. When debasement actu- 
ally occurs, a business panic is likely to ensue. This 
greatly contracts the volume of business transacted, and 
diminishes the demand for money. Such a lessening of 
the demand for a medium of exchange will enable the 
cheap dollars to supply the entire demand for money 
more quickly than would be possible otherwise. 

§ 151. We must consider now the result of placing 
the inferior silver coins in circulation side by side with 
Effects of ^^G superior gold coins. If the nation's 
debasement, demand for money remains unchanged at 
$60,000, the result of placing 60,000 of the silver dollars 
in circulation will be merely to drive the 60,000 gold 
dollars out of circulation. If the coinage of silver dol- 
lars should be stopped at that point, so that the supply 
of money would remain at $60,000, there would be no 
change in the general level of prices. The nation's 
stock of money and its demand for money would both 
be unchanged, and general prices could not be altered. 
If, therefore, the supply of the cheaper silver dollars 
should be absolutely limited to $60,000, the silver 
money would perform all the business of the nation as 
well as the gold ; and the purchasing power of 371.25 
grains of fine silver in a dollar would be twice as great 
as the purchasing power of 371.25 grains of silver in 
the form of bullion. But this wbuld hold true, be it 
remembered, solely upon the condition that the coinage 



DEBASED MONEY, 255 

of silver dollars should bo absolutely limited to |G 0,000. 
As a matter of fact, there is very little likelihood that 
the nation could limit its coinage in this manner. Three 
causes would in all probability lead to an increase of 
the silver coinage : — 

(jx) The government could make a large profit by 
buying silver bullion, converting it into silver dollars, 
and using these dollars to pay debts. Whenever the 
sovereigns of Europe debased their coinages, this mo- 
tive almost always led them to continue to put debased 
money into circulation long after the demand had been 
satisfied. 

(&) Owners of silver mines might continually urge 
the government to open its mints to the free coinage of 
silver dollars, since these mine-owners could, at the 
start, carry 371.25 grains of silver bullion to the mints, 
and have it coined into dollars which would exchange 
for as many commodities as 742,50 grains of silver 
bullion would command in the market. In the United 
States the owners of silver mines have incessantly urged 
Congress to allow free coinage of the 371.25-grain silver 
dollar, and have expended large sums of money in fur- 
thering political agitation for the free coinage of silver. 

(c) In all countries there are many debtors who 
would welcome the opportunity to pay off their debts 
in money which is worth less than that in which the 
debts were contracted. If the amount of money in the 
country should be increased much beyond $60,000, then 
its purchasing power would surely begin to decline. 
As money becomes less and less valuable as compared 



256 PRINCIPLES OF ECONOMICS. 

with commodities, the burden of all debts is lessened 
It is for the apparent interest of debtors, therefore, to 
have the amount of money as large as possible. When- 
ever coins are given a legal-tender power greater than 
their bullion value, then it is eas}^ to increase or inflate 
the currency with cheap money. Human nature is 
likely to succumb to such a temptation as cheap money 
holds out to debtors. In the United States we have 
been cursed by an agitation in favor of cheap money for 
the last two centuries. Any one of these three forces, 
still more two of them combined, would in many cases 
be sufficient to cause the passage of laws opening mints 
to the free coinage of the cheaper money. 

Let us now trace the effect of increasing the coinage 
of silver dollars beyond 60,000, the limit set by the real 

„^. ^ demands of trade at the old level of prices, 

mtunate ^ 

results of It is clear that, if the number of silver dol- 
lars should increase to 70,000 within the 
space of a year, the purchasing power of each coin 
would tend to decline ; since it is not likely that the 
demand of any country for money could increase cor- 
respondingly within a period of twelve months. If the 
number of dollars should increase to 80,000, the fall in 
the value of money would be more rapid, and the rise 
of prices would be very marked. Now what limit, if 
any, will there be to the increase of such a silver coin- 
age ? Manifestly there will be an inducement for per- 
sons to carry silver to the mints to be coined just as 
long as the money value (that is, the purchasing power) 
of the silver dollar remains greater than the purchasing 



DEBASED MONEY, 257 

power of 371.25 grains of pure silver. When prices 
rise so that 371.25 grains of fine silver will purchase no 
more commodities when coined into a dollar than it will 
purchase when in the form of silver bullion, the coinage 
of silver will cease. In other words, when the purchas- 
ing power of a silver dollar falls to the level of the pur- 
chasing power of 371.25 grains of fine silver bullion, 
then there will be no inducement for any one to bring 
any more silver to the mints. This amounts merely to 
saying that the money value and the bullion value of 
silver will always tend to be the same, when people are 
left free to convert bullion into coin and coin into 
bullion. 

A final point now demands attention. Is it not possi- 
ble that the increased demand for silver as money, since 
it leads to the conversion of bullion into _,. 

The value of 

coin, may diminish the supply of silver silver buiuon. 
bullion and raise its marginal utility ? Manifestly such 
a thing is conceivable. If the silver mines should be- 
come exhausted, or the production of silver should be 
stopped, then the conversion of bullion into coin would 
very rapidly raise the marginal utility of silver bullion. 
If the marginal utility of the limited stock of bullion 
should increase rapidly, then the fall in the purchasing 
power of the silver dollar could not be so great. The 
fall in the purchasing power of the dollar would be met 
sooner or later by the rise in the value of the silver 
bullion. Whenever this should happen, equality would 
be restored between the money value and the bullion 
value of silver. The coinage of silver would then cease, 

17 



258 PRINCIPLES OF ECONOMICS, 

and prices would rise no longer. But, on the other 
hand, suppose that the production of silver cannot be 
limited. Then the supply of silver bullion will contin- 
ually increase. If production remain large, the mar- 
ginal utility of silver bullion would not be increased by 
reason of the demand for silver as money. All would 
depend upon whether the new demand for silver as 
money should prove to be greater or less than the ad- 
ditional supply of silver which could be put out of the 
mines. This additional supply would probably be pro- 
duced at a greater marginal expense from ores which 
could not be worked profitably when the value of 371.25 
grains of bullion was only fifty cents. If the supply 
could be increased very largely with only a slight in- 
crease of the marginal expense, then the coinage of sil- 
ver would rapidly become excessive, and the purchasing 
power of each coin would fall greatly. If the marginal 
expense of producing the larger supply increased veryi 
rapidly, the supply of silver dollars, hence the deprecia- 
tion of each coin, could not be so great. In any case,] 
the supply of silver dollars would increase until the 
decline in the purchasing power of each coin should! 
make the value of a dollar equal the marginal expenses] 
of production. 

IV. Inflation and Contraction. 

§ 152. The use of debased coin opens the door for a 
sudden increase, or inflation, of the supply! 

Tnflfltinn. 

of money. When the weight or finenesi 
of existing coins is arbitrarily reduced, it is easy toj 



INFLATION AND CONTRACTION. 259 

increase their number. When the money consists of 
gold alone, it is easy to inflate a currency by giving 
legal-tender power to silver coins that have a smaller 
bullion value than the gold coins. Similarly, if silver is 
the standard money, inflation may be produced by cir- 
culating legal-tender gold coins which have a smaller 
bullion value than the silver coins. This was attempted 
in the colony of Massachusetts in the last century. But 
if, on the other hand, only coins of an equal bullion 
value are allowed to serve as legal tender, inflation can- 
not take place unless sudden discoveries of gold and 
silver, or improvements in the art of mining, increase 
the supply of money faster than the needs of trade. 
Even when this happens, a rise of prices will increase 
the expenses of mining the precious metals, and will 
have a tendency ultimately to check their production. 
Evidently the difficulty or the cost of producing the 
precious metals generally proves a bar to an increase of 
gold or silver money beyond the needs of trade. It is 
clear that any sudden rise of prices caused by such a 
rapid inflation will work injustice in the case of all long- 
term contracts. If prices suddenly rise, debtors are 
enabled to pay old debts in money which will command 
fewer commodities than that in which the debts were 
contracted. Such a change in the purchasing power of 
money is unjust to the creditors. 

§ 153. On the other hand, it is possible for the 

world's stock of metallic money gradually 

, T -n 1 , ' , Cofitraction. 

to decrease. Each year a certam amount 

of coin and bullion is lost by accident or bj abrasion 



260 PRINCIPLES OF ECONOMICS. 

while in use. Now, if the gold and silver mines do not 
furnish enough to make good this loss, the supply of 
bullion and of money will gradually decrease. Besides 
this, it is possible that the total amount of money needed 
by the civilized world increases in prosperous years. 
Now, if the mines do not yield enough gold and silver to 
provide for this increased demand for money, as well as 
to make good the yearly loss of the precious metals, 
then the supply of money will undergo a relative de- 
crease. Contraction of the money supply may, there- 
fore, take place either by an absolute decrease of the 
stocks of gold and silver, or by a failure of the stocks to 
increase as fast as the demand for money and bullion 
increases. Now, a contraction of the money supply 
tends to lower all prices, and to oblige debtors to pay 
long-standing debts in money which purchases more com- 
modities than were commanded by the money in which th( 
debts were originally contracted. This is exactly as un- 
just as it is to cheapen money, and to enable debtors to 
pay debts with money of inferior purchasing power. 

§ 154. We must conclude, therefore, that a sudden 

increase of prices is unjust to creditors, while a sudden 

Evils of fall of prices is unjust to the debtors. If 

voi^?of"^^ changes take place slowly, less harm is 

currency. done ; but it is hard to see how one party oi 

the other can fail to suffer. Recognizing this fact, some 

persons have proposed to maintain without change 

fixed level of prices. They have desired to accomplish 

this by having governments take steps to increase oi 

decrease the amount of money in circulation whenever 



INFLATION AND CONTRACTION. 261 

general prices begin to fall or to rise. Another plan is 
to allow contracts for future payments to be made in 
units of a tabular standard of value. This tabular 
standard would be formed by adding together the prices 
of definite units of as many articles of common con- 
sumption as can be secured for the purpose. Whenever 
the total prices of these commodities should rise, the 
money value of long-term contracts would be increased 
accordingly ; and when the tabular unit should fall, less 
money would be required to discharge such contracts. 
Both of these plans present a number of practical diffi- 
culties which make them impossible of adoption in the 
near future. There is at present no practicable method 
of avoiding the evil effects of inflation or contraction. 
It is possible, however, to insist that the supply of money 
shall not be increased or decreased in an arbitrary or 
artificial manner. 

Certain forces tend to diminish the injustice done to 
creditors or to debtors by changes in the value of money. 
It has been shown that an appreciation of changes in 
money is partially offset by a decline in the ^f^^^^^en 
rate of interest in those cases where the such injustice, 
appreciation is gradual and regular enough to be fore- 
seen. On the other hand, depreciation of money leads 
to higher rates of interest in cases where it can be fore- 
seen. Yet, when all allowance is made for the influence 
of these changes in the rate of interest, there remains 
" a net loss alternating between debtors and creditors," 
according to changes in general prices.^ 

1 See Fisher, Appreciation and Interest, 80. 



262 PRINCIPLES OF ECONOMICS. 

It is sometimes said that it makes no difference 
whether the amount of money in a country is large or 
other con- small. If the supply is large, prices are high, 
siderations. ^nd it takes more money to exchange the 
same commodities ; while if the supply is small, prices 
are low, and the same commodities are transferred by 
means of a smaller amount of money. There is some 
truth in this claim, provided that it is remembered that 
changes in the amount of money are harmful. Also, the 
statement should be qualified by noticing that a country 
may have so little money that people may be driven to 
barter, and industries may be greatly injured. In con- 
cluding this subject, it will be well to consider certain 
other effects of contraction and expansion. 

1. Contraction tends to depress productive industry. 
Most debts are owed for capital borrowed for use in pro- 
ductive enterprises. The managers of business under- 
takings form a most important part of the debtor classes. 
Now, suppose that a producer borrows 110,000 in order to 
help build a factory or to buy a farm, and suppose next 
that the value of money begins to increase on account of 
a contraction of the supply. Then prices will fall as fast 
as the value of money rises, and the borrower will have 
to produce a much larger amount of cloth or farm prod- 
uce than would be necessary otherwise in order to pay 
the debt of $10,000. Under such circumstances, which 
are as a matter of fact very common, falling prices caused 
by currency contraction have been well called a millstone 
around the neck of productive industry. 

2. On the other hand, it has been thought that a 



GOVERNMENT PAPER MONEY, 263 

gradual rise of prices tends not only to lighten the burden 
of debts owed by producers, but also to encourage all 
productive industry. Higher prices mean more pros- 
perous times for all producers. In this claim one fact 
is overlooked. Rising prices are sure to stimulate spec- 
ulation. If the rise is long continued, multitudes of new 
enterprises will be established. Some of these may be 
wisely planned and managed, others are sure to be estab- 
lished unwisely. Many of them will be founded by means 
of borrowed capital, which is easier to secure in times of 
prosperity. These causes lead to the establishment of 
too many enterprises in some lines of business. Over- 
production of such commodities will ensue, and the prices 
of these particular commodities will fall below a paying 
point. Then comes failure and widespread business 
disaster, which may not be confined to the particular 
industries where over-production occurred. Such results 
are likely to come about even when prices are not raised 
by means of an expanding currency. Inflation simply 
intensifies forces which are only too likely to come into 
operation without such a stimulus. 

V. Government Paper Money. 

§ 155. Government paper money consists usually of 
pieces of paper upon which a government prints its 
promises to pay. Usually no time of payment 
is specified, and the payment or ultimate government 
redemption of such notes depends solely upon ^^^ ™oney. 
the desire and ability of the government to keep its 
promises. In a few cases such paper has been redeemed 



264 PRINCIPLES OF ECONOMICS. 

at its face value ; but much oftener it has been repudiated, 
or has been redeemed only in part. In some cases gov- 
ernment paper has not borne upon its face the promise 
of the government to pay, and has consisted simply of 
pieces of paper that the government has declared to be 
legal tender in the payment of all debts. 

§ 156. Manifestly it is very easy for a government to 

pay a debt by issuing paper promises to pay, and such a 

History of course has often been resorted to. In the 

government United States the colony of Massachusetts 

issues in the -^ 

United States, made an issue of "bills of credit," in the 
year 1690, for the purpose of paying the expenses of a 
disastrous military expedition. Some years later other 
colonies followed her lead, and during the eighteenth 
century issues of bills of credit were often resorted to by 
most of the colonies. In the Revolutionary War, and 
again in the Civil War, similar issues were made by the 
United States. It is evident that the people of this 
country have had sufficient experience with such currency 
to enable them to learn from their own history how gov- 
ernment paper actually works. 

§ 157. The advocates of government paper money 

have advanced the following claims in its favor : — 

The arguments 1. Government paper is cheaper than 

Sve^ent S^ld or silver. By its use a nation saves the 

paper money, expense of procuring and maintaining a 

stock of the precious metals. This is certainly true so 

far as it goes. Yet in foreign trade^the precious metals 

would have to be used, as one nation does not accept the 

legal-tender paper issued by another. 



GOVERNMENT PAPER MONEY. 265 

2. it is said that government paper may be used as 
a medium of exchange with perfect safety and conven- 
ience, so long as means are taken to prevent it from 
being issued in excess of the demands of trade. One 
scheme to secure such a limitation is to give the holders 
of such notes the right to convert them into government 
bonds that bear interest. It is said that so long as the 
notes are needed in business they will remain in circula- 
tion, while so soon as the amount of government paper 
becomes too great and prices begin to rise, the note- 
holders will begin to find it advantageous to exchange 
the notes for government bonds. In this way the issue 
of paper could never be excessive. In answer to this 
claim we must admit that such paper money could keep 
its value and need not depreciate if the bars to its over- 
issue could be maintained. But this is precisely the 
trouble. Various causes, which will be explained later, 
make it difficult, if not impossible, to enforce any limita- 
tion upon the issues. It is possible to say that, if a 
nation needs $60,000 of money to effect its exchanges, 
then 60,000 paper dollars may be used, and the general 
level of prices will remain at its former figure. But if 
it is practically impossible to limit the paper to 60,000 

; dollars, then it is idle to speculate about what might be 
I if things were only different from what they are. 

3. The least intelligent advocates of government 
I paper say that any kind of money depends for its ex- 

I istence solely upon the. action of a government in declar- 

i, ^ 

mg it to be legal tender. Therefore, if a government 
makes paper a legal tender, and obliges creditors to re* 



266 PRINCIPLES OF ECONOMICS. 

ceive it in payment of debts, the paper will be just as 
good money as gold and silver. All money exists by 
reason of the " fiat " of the government ; hence, anything 
that the law declares to be money is just as good as 
any other kind of money. Since we have explained the 
origin of money, it is not necessary to do more than 
remind the reader that this claim of the " fiat money " 
advocates is false in every way. Gold and silver were 
used as money long before legal-tender laws were ever 
thought of, and before governments even thought of 
coining money. 

§ 158. It is necessary to admit that paper money 
might be used for domestic exchanges if only its quan- 
tity could be limited. But the chances 

Objections to "^ 

government always are that such limitations will not 
paper money. ^^ observed. The same influences that lead 
to an excessive coinage of cheap metallic money almost 
inevitably lead to an excessive issue of paper. First, 
the needs of the government are likely to increase, and 
to lead to increased issues of paper in order to pay 
public expenses. In almost every case in our history 
when governments have issued paper in order to pay 
extraordinary expenses, they have issued ultimately 
much more than they originally intended. Thus the 
Continental Congress began by issuing 13,000,000 of 
paper in the summer of 1775, but issued $241,000,000 
before it ceased to depend upon such means. Second, 
the debtor classes are likely to favor a large issue of 
paper currency, and to resort to political agitation in 
order to secure it. This is because excessive issues 



GOVERNMENT PAPER MONEY, 267 

raise prices and depreciate the money. Depreciated 
money can then be used to pay old debts, and the 
burden of all debts can be lightened. In the United 
States we have had repeated instances of such agitation. 
From 1710 to 1789 the political history of most of the 
colonies was blackened by the most bitter contests of 
dishonest debtors to secure an abundance of cheap 
money. Elections often turned wholly upon this issue, 
and the lower houses of the colonial legislatures were 
often controlled by a body of insolvent debtors. Since 
the Civil War we have had another movement in favor 
of government issues of paper, and we are still in the 
midst of an agitation in favor of cheap money. In the 
United States, as has been shown by two hundred years 
of experience, the danger of an over-issue of government 
paper would be very great. Wise men will not refuse 
to learn by experience. 

Government paper money may be viewed as a medium 
of exchange whose bullion or commodity value is noth- 
ing but the insignificant value of a piece of j.^irther 
paper, but which is given by act of govern- objections, 
ment a considerable legal-tender power. It will pre- 
serve its value as a medium of exchange only so long as 
its supply is limited according to the demands of trade. 
It has happened that legal-tender paper, when first put 
into circulation, has caused no appreciable rise of prices, 
and has circulated at a parity with gold and silver. Of 
course such paper drives an equal amount of gold or 
silver out of circulation, but specie may not entirely 
disappear until there is a sufficient quantity of paper to 



268 PRINCIPLES OF ECONOMICS. 

take its place. It may happen, however, that the pi*0S' 
pect of unhmited issues of paper may cause a scramble 
for specie, and may cause specie to disappear more 
quickly. So soon as gold and silver go out of circula- 
tion, the value of government paper will depend solely 
upon the amount of it which the government decides to 
issue. As fast as the paper increases beyond the needs 
of business, prices begin to rise and the paper depre- 
ciates. Now there is no limit to the extent to which the 
depreciation may go. Government paper has no appre- 
ciable cost of production. The " bullion " or commodity 
value is practically nothing, and the paper money may 
be issued until it becomes absolutely worthless. When 
the Continental Congress ceased issuing bills of credit, 
the notes were worth less than three cents on the dollar. 
It is important to note, also, that this depreciation is in- 
dependent of any desire or ability of the government to 
redeem the paper ultimately in gold or silver. Even if 
redemption at a future date were absolutely certain, the 
paper would depreciate as soon as it should be issued 
in excess of the demands of trade. There is, therefore, 
no limit to the extent to which a paper currency may 
be inflated. 

§ 159. As a general thing, government paper money 

is not immediately convertible into coin. The govern- 

ment may promise to pay gold or silver in 

government redemption of the notes, but the fulfillment 

^^^' of this promise is almost always postponed 

for a considerable time. Thus the United States issued 

legal-tender notes in 1862, and did not begin to redeem 



LITERATURE. 269 

them until 1879. The notes were inconvertible for all 
this period. Since 1879 the United States has main- 
tained in the Treasury a stock, or reserve, of gold, with 
which it has been ready to redeem the United States 
notes, or " greenbacks," whenever they have been pre- 
sented. The present " greenbacks " are immediately 
convertible into coin upon demand of the holder, and 
so differ very materially from government paper money 
of the usual type. 



LITEEATUEE OK CHAPTEE VIII. 

General References : Andrews, Institutes of Economics, 118- 
157; Ely, Outlines of Economics, 140-165; Gide, Political Econ- 
omy, 186-235, 272-319; Hadley, Economics, 180-263; Jevons, 
Money and the Mechanism of Exchange; Macvane, Political 
Economy, 122-192; Mill, Principles of Political Economy, Bk. III. 
Chaps. 7-26; Nicholson, Money and Monetary Problems; Ros- 
CHER, Political Economy, Bk. II. ; Walker, Political Economyj 
120-170, 433-474, Money ; White, Money and Banking ; Report 
of the Monetary Commission of the Indianapolis Convention, 
77-137, 389-490; Nicholson, Principles of Political Economy, 
11. 88-214. 



270 PRINCIPLES OF ECONOMICS 



CHAPTER IX. 

MONEY AND CREDIT. 

I. Credit and Instruments of Credit. 

§ 160. Hitherto it has been assumed that money is 
actually used in eifecting every exchange, and that no 
Definition other method exists by which commodities 
of credit. qj. services are transferred. But tlie com- 
mercial world uses credit as an instrument for carrying 
on a large part of its exchanges. Credit may be de- 
fined as the power to secure commodities or services at 
the present time in return for some equivalent promised 
at a future time. Any credit transaction involves, of 
course, a certain amount of confidence in the ability of 
the debtor to make the future payment. Whenever a 
person can convince others that he is able to make such 
future payments, he is said to have credit. 

§ 161. In most credit transactions, the creditor is 

careful to secure some written instrument which will 

Instruments serve as evidence or proof of the obligation 

(i)*^Bo?k ^^ ^^^^ debtor to make future payment. A 

credits. very common credit transaction is seen in 

the case of book credits. Commodities or services are 

sold, and the amounts due are charged to the buyers in 



CREDIT. 271 

the account books of the sellers. A may buy supplies 
to the amount of 1200 from B, and B may buy farm 
produce to the amount of fl50 from A. Then at the 
end of the season A can simply pay B 150, and ex- 
changes to the amount of $350 will be settled by the 
payment of $50 in actual money. 

§ 162. A promissory note is a written promise to pay 
upon demand, or at some specified time. Such a note 
may serve as a means of payment in several ^2) Promis- 
transactions. The payee, or holder of the sory notes, 
note, may, by writing an order on the back and signing 
his name, make the note payable to a third person. By 
indorsing the note in this manner, any holder may use 
it as a means of paying his debts. When the final 
holder presents it for payment, it may have effected a 
number of exchanges. 

§ 163. " A check is an order drawn by an individual 
or company upon a bank ordering the payment of a cer- 
tain sum of money to the order of a person 
named, or to the bearer of the check." A 
check can be drawn only against a deposit of money in 
the bank, or against a credit previously agreed to by the 
banker. Now let us assume that A owes B fifty dollars, 
that B owes C fifty dollars, and that C owes D fifty dol- 
lars. Assume also that the four men have deposits at 
the same bank. Then A, B, and C may draw checks for 
fifty dollars payable to B, C, and D, respectively. In 
due time B, C, and D will deposit at the bank the checks 
received from A, B, and C, respectively. Then the 
banker will deduct from the deposits of A, B, and C the 



272 PRINCIPLES OF ECONOMICS, 

amounts of the checks drawn by them, while he will 
credit B, C, and D with the amounts of the checks which 
they present. The net result will be that the deposit of 
A will be decreased by fifty dollars, the deposits of B 
and C will remain the same, while the deposit of D will 
be increased by fifty dollars. In this way the three 
debts may be paid without the actual use of any money. 
Now, if the four men have accounts with different banks 
in the same city, the banks will settle their accounts 
with each other through a clearing house. The cus- 
tomers of each bank deposit with it all checks received 
by them, and they are credited with the amounts of 
money represented by such checks. Then each bank 
takes to the clearing house all of these checks which 
are drawn upon other banks. At the clearing house it 
will find that other banks have received checks drawn 
upon itself. If a bank sends to the clearing house checks 
to the amount of 110,000, while it finds there checks 
drawn against itself to the amount of |12,000, the bank 
will be indebted to the clearing house for |2,000, which 
balance it will have to pay in money. On the other 
hand, if the checks drawn upon this bank had amounted 
to $8,000, the bank would have received the balance 
of 12,000 from the clearing house. In this manner 
different banks very conveniently settle all their mutual 
obligations by merely paying the balances against them, 
or receiving balances due them, at the clearing house. 
Banks located in different places settle their accounts 
with almost equal ease. Banks in country districts have 
agents, or corresponding banks, in the nearest clearing 



CREDIT. 



273 



house city, so that every clearing house performs this 
work of settling accounts for the banks of the adjacent 
territory. Then the New York clearing house acts as a 
central clearing house for the banks of the entire coun- 
try, since every important city bank corresponds with 
some New York bank that is a member of the clearing 
house. In 1895 the total transactions of the clearing 
houses of the country amounted to $51,111,591,928. 
The New York clearing house effected $28,264,379,126 
of these transactions. The following diagram, taken 
from President Andrews' " Institutes of Economics," 
page 152, illustrates the operations of a national clear- 
ing system : — 

Providence New Orleans Chicago San Francisco 

ABCDEPGHIJKL MNO PQR STUVWX 

1st Nat'l 2d Nat'l 3d Nat'l 4th Nat'l ' 5th Nat'l 6th Nat'l 7th Nat'l 8th Nat'l 
Bank Bank Bank Bank Bank Bank Bank Bank 




Metropolitan 



New York Clearing House Banks 
Chemical Stuyvesant 




Manufacturers 



New York 
Clearing House 



^ § 164. A bill of exchange, or draft, is a written order 
by which the person who draws the bill orders a second 
person, the drawee, to pay a specified sum of money 

18 



274 PRINCIPLES OF ECONOMICS. 

to a third person. Such bills may be paj^able at sight 
or after a specified time. They are made payable to 
a specified person, but by indorsement may 
exchange and be transferred to other persons. When this 
^^^* is done, a single bill may serve to pay sev- 

eral debts before the drawee is called upon to make 
final payment. Bankers are willing to buy bills of ex- 
change drawn by responsible persons upon their debtors. 
Also, they are willing to sell drafts to persons who wish 
to make payments in distant places. These drafts the 
bankers draw upon the banks with which they corre- 
spond in distant cities. Then the bills of exchange and 
the drafts bought and sold in one city may be set off 
against bills and drafts bought and sold by correspond- 
ing banks in other cities. Money need be sent from one 
city to the other only when the obligations incurred by 
one bank exceed the obligations incurred by its corre- 
sponding banks. Even then only the balances need be 
paid by forwarding money. 

Foreign bills of exchange require special explanation. 
Private banking-houses having branches in several coun- 
ForeignMUs tries make a business of dealing in foreign 
of exchange, exchange. Such bankers are sometimes 
called exchange brokers. A person who wishes to make 
any payment in a foreign country can procure from an 
exchange broker a draft on that country. Men who 
wish to invest capital in a foreign country, to pay for 
goods bought from foreign merchants, or to travel 
abroad, can purchase such drafts with which to make 
the necessary payments. Again, any merchant who 



CREDIT. 275 

sells goods to a foreign customer can draw a bill of 
exchange upon that customer, and sell it to an ex- 
change broker. Thus it happens that brokers find a 
constant demand for drafts upon other countries, and 
a constant supply of bills of exchange offered for sale. 

Now, suppose that the New York branch of a firm of 
exchange brokers sells drafts on London to the amount 
of 1100,000 during a week, while it buys settlement of 
bills of exchange drawn on London to the foreign ex- 
amount of $200,000. Then it will owe the out the use 
London branch of the firm 1100,000 for o^^^o^^y. 
the drafts, and will have 1200,000 owed to it by the 
London branch after the bills of exchange have been 
presented to the English merchants for payment. One 
of these accounts can be used to offset the other, and the 
accounts of the two branches with each other can be 
settled if the London branch merely sends 1100,000 in 
money to New York. But probably this will not be 
necessary. During the same week the London branch 
of the firm may sell drafts and buy bills on New York 
in such an amount that a balance of 1100,000 will be 
owed by the New York branch. One of these balances 
will offset the other, so that all the transactions may be 
settled without the actual payment of any money. 

But now suppose that the course of business is such 
that many Americans are called upon to make large 
payments to English creditors, while few 

^ Money may te 

LngJishmen are owing money in America, needed to set- 
Then it will happen that the New York *^^^^^^^^- 
branch will be constantly selling drafts on London, 



276 PRINCIPLES OF ECONOMICS, 

while few bills of exchange on London are offered to it. 
Also the London branch will be selling few drafts on 
New York, but will be buying many bills of exchange 
drawn by English merchants on American customers. 
The result of such a condition of business will be that 
the American branch will owe each week a considerable 
balance to the London branch. The managers of the 
two branches may believe that in two or three months 
the course of business may turn the other way, so that 
they will let the accounts run until a turn in the ex- 
changes causes them to balance again. In this manner 
the expense of shipping money will be avoided. But 
during the time that the balances are running against 
the New York branch, the price of drafts on London 
will be raised, while bills of exchange drawn on London 
will command a premium. This is because the many 
drafts on London sold by the New York branch cause 
an excessive drain on the ready money of the London 
branch, while the few bills of exchange drawn in New 
York upon London debtors are insufficient to replenish 
this money supply. The increased charge for drafts in 
New York tends to decrease the demand, while it com- 
pensates for the additional trouble to which the firm is 
put to make payments in London. On the other hand, 
the premium paid for bills drawn on London tends to 
increase the supply offered, and to furnish the money 
that is needed in London. 
The rate of Now, there are limits to the extent to which 
exchange. ^j^g price for drafts can be raised, and also 
limits to the amount of the premium which the brokers 



CREDIT. 277 

can afford to pay for bills of exchange. The English 
pound sterling is equal to $4,866 of our money, and the 
expense of paying freight and insurance on a corre- 
sponding shipment of gold across the Atlantic, amounts 
to about two and one half cents. Now, exchange brokers 
could not charge much more than 14.866 + 1.025 for 
drafts of a pound sterling on London ; otherwise the 
people who desire to make payments there would find it 
cheaper to send gold than to buy '' exchange," that is, to 
buy drafts. Similarly the brokers would not pay much 
more than $4.89 for each bill of exchange on London for 
the sum of a pound sterling, because it would be cheaper 
to ship gold from New York to the London branch. 

Conversely, let us suppose that business conditions 
are such as to make the demand in England for ex- 
change on New York much greater than the 
demand in New York for exchange on Lon- 
don. Then the New York branch would find that the 
London branch was selling many drafts which were 
being presented in New York for payment, while few 
bills of exchange were being drawn by London mer- 
chants and sent to New York for collection. Also there 
would be little demand in New York for drafts on 
London, but many bills of exchange on London would 
be offered for sale. Then the managers of the New 
York branch would sell drafts on London for two or 
three cents less than f4.866 for each pound sterling, 
since this would be a cheaper method of replenishing 
the money of that branch than the actual shipment of 
gold from London to New York. Furthermore, the 



2T8 PRINCIPLES OF ECONOMICS. 

price at which the New York branch would buy bills of 
exchange on London would be less than $4,866. The 
excessive supply of such bills offered for sale by Ameri- 
can creditors would depress their market value. The 
price could not fall more than three cents below 14.866, 
since it would then be cheaper for American creditors 
to instruct their English debtors to make their payments 
by sending gold. In these ways the prices at which bills 
of exchange sell in New York, and the prices at which 
drafts on London can be bought will depend upon the 
state of the exchanges between the two points. The 
cost of shipping gold will always determine the extreme 
limits within which exchange will fluctuate. But by 
means of drafts and bills of exchange, actual shipments 
of gold will be avoided in most cases ; so that the great 
mass of foreign transactions will be settled without the 
use of money. It will be well to add here that the same 
principles which apply to foreign exchanges apply to 
domestic exchanges. 

§ 165. Bank notes are another form of instruments 
of credit, and serve to lessen the amount of metallic 
(S) Bank money used in effecting exchanges. A bank 
notes. ^Q^Q jg simply a promissory note issued by 

a bank, and is supposed to be payable at the demand of 
any holder. When banks redeem such notes promptly, 
bank notes circulate readily from one person to another 
in payment of debts. Then they lessen the demand for 
metallic money. But we shall have to notice that a 
bank cannot issue such notes safely without maintaining 
a certain " reserve " of specie. 



BANKS. 279 

IIo Banks as Institutions of Credit. 

§ I660 A bank has been defined tersely as " a manu- 
factory of credit and a machine of exchange." It is 
important to have some knowledge of the The bank, 
manner in which a bank carries oat its functions as an 
institution of credit. 

§ 167. Historically the earliest function exercised b^ 
banking institutions was that of receiving for safe keep- 
ing deposits of money and bullion. In almost The deposit 
all times such institutions have existed, f'lnction. 
Modern banking did not originate distinctly in the estab- 
lishment of banks of deposit, but all modern banks 
exercise the deposit function. Bankers receive deposits, 
and hold them subject to the demands of the depositors. 
Originally they were paid for keeping such money in a 
place of security ; now they make a profit by investing 
the money, in some cases even paying interest to deposi- 
tors. This change has taken place on account of the 
exercise by banks of the function of discount. 

§ 168. The principal form in which banks lend money 
at the present day is the form of discount. In bank 
discount the bank deducts interest on its The discount 
loans at the time the money is borrowed. f«Jiction. 
Money lenders have, of course, existed in all times and 
places ; but banking institutions, because they com- 
bine the functions of deposit and discount, became the 
principal money lenders of the modern world. They 
received surplus money for safe keeping ; and so easily 
utilized the idle moneys of a comrtiunity by loaning them 



280 PRINCIPLES OF ECONOMICS. 

to persons who desired to borrow. Depositors could not 
object to having a banker lend part of their deposits to 
responsible persons, so long as he managed the transac- 
tion in such a way as to be able to meet all their demands. 
By utilizing deposits in this manner, bankers could 
afford to receive deposits without charge for keeping 
them in safety, and in some cases could offer interest 
as an inducement for people to deposit money, which 
could be loaned at a higher rate of interest. 

§ 169. In combining the functions of deposit and dis- 
count the bank becomes distinctively a " manufactory of 
credit." Suppose a banker to start in busi- 

Ulustration . ^ ^ 

of baaking ness with a capital of 150,000, and suppose 
^^ ° ^* that he receives deposits from two hundred 
customers. His capital serves as a guarantee for the 
safety of these deposits. Now, some of the depositors 
will continually draw out a portion of their deposits, 
while others will increase theirs. As a result, the banker 
finds that he has usually about $100,000 left in his 
keeping. He concludes that his customers have about 
that amount of idle capital which they will prefer to 
leave on deposit as long as they have confidence in his 
honesty and business ability. He concludes that, since 
he always has on his hands about $100,000 of deposits, 
and 150,000 of his own capital, he can safely lend the 
larger part of these sums to reliable persons who can 
furnish adequate security. Now, the persons who bor- 
row money may prefer to leave the money borrowed on 
deposit with the banker, subject to their drafts by check. 
If this occurs, a bank creates a deposit when it makes a 



BANKS. 281 

Joan. The deposits in banks regularly increase when 
their loans and discounts are increased, and vice-versa. 

After receiving $100,000 of deposits, the Detailed 
accounts of the banker would be as follows : operations. 



Liabilities. 

Capital . . . 160,000 
Deposits . . 100,000 


Resources. 
Cash . . . $150,000 



$150,000 $150,000 

Now suppose that the banker lends to fifty customers 
1100,000 for ninety days at six per cent interest. Then 
he will deduct $1,500 for interest, and credit the bor- 
rowers with deposits to the amount of $98,500. His 
account will now stand as follows : — 

Liabilities. Resources. 

Capital. . . . $50,000 Cash $150,000 

Deposits , . . 198,500 Loans and discounts . 100,000 
Profits .... 1.500 



$250,000 $250,000 

Suppose next that various depositors draw out 
$50,000. Then the accounts of the bank will stand as 
follows : — 

Liabilities, Resources, 

Capital .... $50,000 Cash $100,000 

Deposits . . . 148,500 Loans and discounts . 100,000 
Profits .... 1,500 



$200,000 $200,000 

Now the banker may conclude that he can safely 
Increase his discounts by $80,000. If he lends $80,000 



282 PRINCIPLES OF ECONOMICS. 

for ninety days at six per cent interest, and the bor* 
rowers draw out only half of the $78,800 with which 
they are credited after $1,200 has been deducted for 
interest, the accounts of the bank will stand as follows : 

Liabilities. Resources. 

Capital . . . . 150,000 Cash $60,600 

Deposits . . . 187,900 Loans and discounts . 180,000 
Profits .... 2,700 



$240,600 $240,600 

We may summarize these transactions in a few words. 
The banker used the $100,000 originally left on deposit 
with him, and the $50,000 which he had for his original 
capital, as a reserve on the basis of which he incurred 
liabilities for $177,300 advanced to borrowers in the 
form of loans and discounts. He now owes deposi- 
tors $187,900, and has a cash reserve of only $60,600. 
Manifestly, if all of his depositors should demand pay- 
ment at once, he would have to fail. On the other hand, 
at the end of ninety days he will receive $180,000 in 
payment of the notes that he has discounted. He will 
then be able to pay his depositors in full, besides having 
back his capital of $50,000 and profits of $2,700 from 
his business. How is he able to keep his depositors from 
demanding all their deposits at one time ? Simply by 
using his credit carefully. He is careful to ascertain 
just how much money his customers prefer to leave con- 
tinually on deposit with him, he confines his loans and 
discounts within the limits set by the probable demands 
of his depositors, and he lends money only to responsible 



BANKS. 283 

persons who can furnish adequate security. Long expe- 
rience has shown that a reserve of from fifteen to twenty- 
five per cent of the deposits is sufficient to meet all 
demands which depositors are likely to make at one 
time. 

§ 170. Deposit and discount are the general and 
necessary functions which an institution must exercise 

in order to be a bank. But banking institu- ^ ^ ^ 

° other func- 

tions perform a number of other functions tions. wote- 

of which we shall discuss one only. In some 

countries banks have had the privilege of issuing bank 

notes. We have seen that these are simply the banks' 

promises to pay money on the demand of the holders. 

It remains to show that they are exactly similar to bank 

deposits so far as they affect the financial condition of 

the bank. If, in the case we have supposed, the banker 

had paid out 820,000 of his notes to his depositors when 

they demanded money, he would have avoided paying 

out 820,000 of cash ; and would have incurred liabilities 

of 120,000 for the notes outstanding. Then his accounts 

would have stood as follows : — 

Liabilities. Resources. 

Capital .... $50,000 Cash $80,600 

Deposits . . . 187,900 Loans and discounts . 180,000 
Notes outstanding 20,000 
Profits .... 2,700 



$260,600 $260,600 



If bank notes are to be kept strictly convertible into 
coin at the demand of the holder, it is necessary at the 
very least that banks should keep on hand a reserve of 



284 PRINCIPLES OF ECONOMICS. 

money adequate to redeem all notes presented for re* 
demption. In this country much stricter measures have 
been taken. 

III. Advantages and Disadvantages of Credit. 

§ 171. Credit has many advantages, of which the 
Advantages of following are the most important: — 
credit. \ j^ economizes the supply of gold and 

silver. Probably one half of the exchanges of modern 
civilized nations is carried on through the means- of 
instruments of credit. Moreover, payments of large 
sums of money and payments between distant places 
could not be made conveniently in any other way. 

2. Credit enables small sums of money to be accu- 
mulated by banks, and the large capitals thus gathered 
to be used in productive industry. 

3. Credit tends to place the capital of a community 
at the disposal of men who are able to employ it most 
productively. Under normal conditions the man who can 
employ capital most efficiently is the man who can afford 
to pay the highest rates of interest, — the man, therefore, 
who will probably be best able to secure loans. 

§ 172. On the other hand, credit has certain disad- 
vantages. 

1. It leads to indebtedness on the part of the poor 

for the necessities of life, and often encourages extrava- 

Disadvantages gance in consumption. When money is bor- 

of credit. rowed for purposes of personal consumption, 

and not for productive enterprises, credit may be an 

evil. 



DISTRIBUTION OF THE PRECIOUS METALS. 285 

2. It enables doubtful enterprises to be established 
with borrowed money. This has been particularly true 
in the case of railroads. Rascally or incompetent man- 
agers of such enterprises borrow money with too much 
ease from people who know very little about tlieir 
investments. 

3. Credit promotes speculation, and sometimes leads 
to a too rapid growth of certain lines of industry . When 
this happens, a business panic may be caused through the 
failure of such speculative enterprises. 

rV. Territorial Distribution of the Precious Metals. 

§ 173. We have seen that gold and silver, the money 
metals, are in general demand the world over. Gold and 
silver bullion may be sold in all countries as General 
useful commodities ; while either gold coins oJ^^redoS^ 
or silver coins, and sometimes both, can be metais. 
used in paying for purchased commodities. As a medium 
for the payment of debts, gold has been given decided 
preference by the commercial world within recent years ; 
but silver is still in general demand as a useful 
commodity. 

§ 174. Whenever, for any reason, the supply of the 
money metals increases in any region, the coinage of 
money will increase and the money supply Gold and sUver 
will become larger. This must happen be- distributed 

, . . . tlirougli 

cause, otherwise, the increasing supply of changes in 

bullion would lower the value of each unit ^^^^* 

below the value of coins containing the same amount of 



286 PRINCIPLES OF ECONOMICS. 

gold and silver, something which cannot take place so 
long as people are allowed to take bullion to the mints 
for coinage. Now, as the increased supplies of gold and 
silver get into circulation as money, prices will tend to 
rise. When such a rise takes place, more commodities 
will be imported from other countries for sale at the 
higher level of prices. On the other hand exports will 
begin to decrease, because rising prices will increase the 
money cost of production and will prevent some ex 
porters from competing in foreign markets. Hence the 
rise of prices will increase imports and decrease exports, 
until finally imports exceed exports very greatly. Then 
the large excess of imports cannot be paid for by bills of 
exchange drawn against sales of exports ; but payment 
must be made by exporting^ gold or silver, as the case 
may be. This exportation of gold or silver cannot con- 
tinue indefinitely. As the supply of precious metals 
begins to decrease on account of continued exportation, 
prices will begin to fall. Such a fall in prices will cut 
off imports and increase exports, until the former no 
longer exceed the latter. Then the drain of gold and 
silver will cease automatically. It is clear, then, that 
high prices tend to lead to exportation of gold and sil- 
ver, while low prices tend to check such exportation of 
the precious metals. If prices fall far enough, exports 
will be greatly increased, imports will be greatly de- 
creased, and gold and silver will flow into the country 
to pay for the excess of exports sold to foreigners. It- 
appears, therefore, that money tends automatically to 
move away from any region where it becomes cheap on 



DISTRIBUTION OF THE PRECIOUS METALS. 287 

account of high prices, and to move toward regions 
where it is dearer on account of lower prices. 

§ 175. Since the precious metals tend to flow away 
from countries where prices are high, and toward coun- 
tries where they are low, it follows that Relative dis- 
there is a constant tendency toward an goidandsii- 
equalization of general levels of prices in Tf^^^^®®" 
all countries. The purchasing power of countries, 
money cannot remain permanently very much higher 
in one country than it is in others. Each country will 
need a certain amount of money in order to effect its 
exchanges at the same level of general prices that pre- 
vails in other countries. If any country has less than 
the amount needed for that purpose, prices will fall in 
that country, and gold or silver will begin to move 
thither. Conversely, if any nation has more than this 
amount, prices will rise, and the money metals will 
flow elsewhere. It follows, therefore, that the world's 
stock of the precious metals will constantly tend to be 
distributed among different countries in proportion to 
their relative demands for the money needed in order to 
maintain the same general level of prices. 

§ 176. Most of the great nations of the world do not 
produce large quantities of gold and silver. In the few 
countries where large amounts of the money situation of 
metals are produced, there is a constant ten- produce the 
dency for the value of gold and silver to fall. ^"^""^^ °'^*^- 
This means, of course, a somewhat higher level of prices, 
an excess of imports over exports, and a constant expor- 
tation of the precious metals. The result is that gold 



288 PRINCIPLES OF ECONOMICS. 

and silver tend to move away from the countries where 
thej are produced, and toward countries where their 
value is not continually lessened through a large pro- 
duction. Of the $2,600,000,000 of gold mined in the 
United States since 1848 probably less than one half 
remains in circulation in the country at the present day. 
The same is true of all the other gold or silver producing 
countries. 

V. Summary of the Theory of Money. 

§ 177. We have seen that, originally, money was any 
commodity which acquired such universal exchange- 
what is ability as to fit it to serve as a medium of 
money? exchange; and that gold and silver gradu- 
ally displaced all other commodities in this function. 
In course of time, bills of exchange, checks, bank notes, 
and government paper money were used as means of 
paying debts. We saw that bills of exchange and 
checks can be safely utilized in payment for commodi- 
ties and services. Bank notes are merely promises to 
pay money, and are safe only so long as bankers are 
obliged to keep them strictly convertible into money. 
Government paper is generally a dangerous medium of 
exchange, and can be used safely only under the strict- 
est provisions for keeping the notes at a parity with 
gold or silver. It appears, then, that all these forms 
of so called " credit money " are based upon promises 
or obligations to pay gold and silver ; and that they 
become exceedingly harmful as soon as they cease to 
be immediately convertible into standard gold or silver 



SUMMARY. 289 

money. Standard coins of gold or silver cannot be 
artificially and arbitrarily increased or decreased, and 
they are accepted as final payment for debts. They 
are, therefore, the only perfect form of money. All 
other instruments of exchange are more or less imper- 
fect, and maintain their credit and acceptability only as 
they are finally convertible into perfect money. We 
may call all such media of exchange " representative 
money," while reserving to gold and silver alone the 
name of money proper. In common usage all media 
of exchange are spoken of as money, and there is no 
harm in this so long as one takes care to distinguish 
money proper from representative money. 

§ 178. In discussing the value of metallic money, we 
assumed tliat all exchanges are effected solely by means 

of money. But we have now seen that a , ^ 

^ Influence of 

very large part of the business of the world credit upon 
(perhaps even more than sixty per cent) 
is carried on without the actual use of anything but 
instruments of credit. How does this fact affect our 
conclusion that the value of metallic money is deter- 
mined primarily/ by the demand for such money and 
the supply, while the cost of production exercises an 
ultimate influence ? It merely obliges us to take account 
of the influence of instruments of credit in determining 
the demand for gold and silver and the effective supply 
of such money. 

§ 179. In the words of Mr. Mill, credit " is purchas- 
ing power ; and a person who, having credit, avails 
himself of it in the purchase of goods, creates just as 



290 PRINCIPLES OF ECONOMICS. 

much demand for the goods, and tends quite as much 

to raise their price, as if he made an equal amount of 

purchases with ready money." A bill of 

The general ^ j j 

effects of exchange or check or bank note or book 
credit is an instrumentality by means of which 
there is carried on a credit transaction that increases 
the demand for commodities. Therefore the total de- 
mand of a community for commodities depends upon, 
■firstj the volume of money, second, the number of credit 
transactions, or the volume of credit. Any cause that 
contracts or expands the volume of credit will surely 
tend to lower or to raise prices of commodities. 
The limit to which credit may be extended depends 
largely upon the confidence of investors and possible 
creditors that business prosperity will enable debtors to 
make repayment, and upon confidence that public and 
private honesty will enforce the fulfillment of lawful 
obligations. It is truthfully said, therefore, that the 
basis of modern business is confidence. Without the 
confidence upon which credit is built up, probably sixty 
per cent of the transactions of the modern business world 
would Ibe impossible. In times of commercial crises, 
the visible cause of disaster is a violent contraction of 
credit which greatly lessens the demand for commodi- 
ties, and leads to a sharp fall of prices. 

§ 180. Credit transactions are all alike in that they 

Detailed ex- furnish means of payment to purchasers who 

pianationof |-^g| ^^ increase the demand for commodi- 
tlie influence *^ 

of credit. ties. But they differ in the exact manner 
in which they accomplish this result. 



SUMMARY. 291 

1. Book credits, bills of exchange, and promissory 
notes merely serve to effect a large number of ex- 
changes without the use of money. They diminish 
the amount of metallic money needed to effect the ex- 
changes of a community or a nation. They may be con- 
sidered either to increase the amount of the medium used 
for exchange, or to decrease the demand for metallic 
money. 

2. Checks can be used only by persons who have 
claims on bankers for certain sums of money. In order 
to meet such claims of depositors, bankers have to keep 
a certain reserve of actual money. So also with bank 
notes. They must be issued against a reserve sufficient 
to insure their convertibility into coin. Bank reserves 
are used as the basis for the issue of a much larger 
amount of representative money in the form of checks 
and bank notes. Each coin of the reserve enables many 
more exchanges to be carried on than could be effected 
if the coin were itself in circulation. Checks and bank 
notes, therefore, merely increase the efficiency of a 
given number of coins, and virtually increase the supply 
of metallic money to that extent. 

3. The late President Walker summed the matter 
up as follows : " While thus, through the operation of 
the Credit System, the occasion for the use of money 
is largely reduced in modern industrial society, and thus 
the demand for money is diminished, the efficiency of a 
given body of money is continually being heightened by 
improvements in the art of banking, and thus the supply 
of money is practically increased." 



292 PRINCIPLES OF ECONOMICS. 

§ 181. Under modern conditions, metallic money 

serves, (1) as a medium of exchange in those trans- 

credit Umited actions where credit instruments cannot be 

by volume used, or are not used: (2) as a reserve for 

of metallic ' ^ y 

money. the circulation of representative or credit 

money. But the amount of representative money that 
can be issued against a definite reserve is quite strictly 
limited, and cannot be increased safely beyond a certain 
point. Hence it can be stated that, as the volume of 
metallic money increases, there may be a considerable 
increase in the volume of representative money ; and 
conversely. In the case of book credits and bills of 
exchange used to pay debts, there may be no such nar- 
row limits to the increase of credit instruments. Yet 
the habits and business customs of a people set final 
bounds to the increase of such credit transactions. We 
conclude, therefore, that modern business needs a large 
amount of metallic money for a medium of exchange ; 
and that the volume of credit is, at any time, limited by 
the volume of metallic money available for use as a 
reserve. 

§ 182. The general level of prices depends, therefore, 
upon the value of metallic money. The value of metallic 
money depends primarily upon the demand, 
as decreased by the use of credit substitutes,^ 
and upon the supply, as increased by the heightened 
efficiency of money when it is used as a reserve for the 
circulation of checks and bank notes. The money value 

1 It may be well to point out that barter has the same effect as credit 
in diminishing the demand for money. 



LITERATURE. 293 

and the bullion value of gold and silver will alwaj^s be 
the same when free coinage is allowed. Ultimately, the 
cost of production must exercise an influence upon the 
supply of the precious metals ; and will, in the long run, 
tend to make their value approximate the cost of produc- 
ing the marginal portion of the supply. 



LITEEATUEE ON CHAPTEE IX. 

General references as in the last chapter. 

For Detailed Treatment of the Credit System, including 
Banking: Bagehot, Lombard Street; Bolles, Practical Bank- 
ing ; Carroll, Principles and Practice of Finance ; Dictionary of 
Political Economy, "Banks"; Dunbar, Theory and History of 
Banking; Goschen, Foreign Exchanges; Macleod, Elements 
of Banking ; Report of the Monetary Commission of the Indianap- 
olis Convention, 159-386; White, Money and Banking; Conant, 
Modern Bank of Issue. 



294 PRINCIPLES OF ECONOMICS. 



CHAPTER X. 

MONETARY HISTORY OF THE UNITED STATES. 
BIMETALLISM. 

I. Monetary History of the United States. 

§ 183. In 1792 Congress established a national coin- 
age. Silver and gold coins were made legal tender at a 
Coin currency ratio of fifteen grains of silver for one grain 
I792-I862. q£ g^]^^ g^Qj^ afterward silver cheapened 
so that 15.61 grains were required in the bullion market 
to purchase one grain of gold. As a result, gold went 
out of circulation ; and the country was thrown upon 
a silver basis. In 1834 and 1837 Congress changed the 
legal ratio of the two metals by reducing the fine con- 
tents of the gold coins. The silver dollar was given a 
gross weight of 412.5 grains, and pure contents of 371.25 
grains. The gold eagle was reduced to pure contents of 
232.2 grains, and to a gross weight of 258 grains. This 
gaYO a legal ratio of 371.25 grains of silver for 23.22 
grains of gold, or 15.988 to 1. The weights of the coins, 
hence the legal ratio, have remained unchanged since 
1837. This new ratio of nearly 16 to 1 overvalued gold 
so decidedly that silver coins began to disappear from cir- 
culation. In 1850 the silver dollar was worth $1.02 in 
gold, and had entirely disappeared from use. Three 



MONETARY HISTORY OF THE UNITED STATES. 295 

j^ears later the discovery of gold in California cheapened 
gold still more, so that Congress had to debase the frac- 
tional silver coins in order to prevent them from being 
melted up and sold for bullion. Our small silver coins 
have been debased ever since. The legislation of 1834 
and 1837 threw the United States upon a gold basis. 
The gold dollar was the sole standard of value in prac- 
tical use after 1884. 

§ 184. In 1862 Congress issued legal-tender paper 
money, after unwise action by the Treasury Department 
had forced the banks of the country to sus- xhegreen- 
pend specie payments, that is, to refuse to ^ac^sofi862. 
meet their obligations in coin. These United States 
notes, or " greenbacks," immediately depreciated. Gold 
went out of circulation, and could be secured only by 
paying a premium. Paper money or currency prices 
rose as fast as the greenbacks depreciated. In 1864 
each note was worth only 49 per cent of its face value. 
The United States had the privilege of paying higher 
prices for everything that it bought, so that the cost of 
the Civil War was fully one billion dollars more than it 
would have been otherwise. In 1875 Congress author- 
ized the Secretary of the Treasury to sell bonds in order 
to procure enough gold to enable him to begin to redeem 
the greenbacks in coin after January 1, 1879. In 1878 
Congress decided to leave 1346,000,000 of greenbacks in 
circulation, and directed that the notes should be reissued 
from the Treasury whenever they should be redeemed or 
paid in for taxes. The greenbacks, therefore, still cir- 
culate, and the government endeavors to maintain a 



296 PRINCIPLES OF ECONOMICS. 

reserve of 1150,000,000 in order to redeem them upon 
demand. 

§ 185. Between 1789 and 1860 many banks were estab- 
lished in the various states. At first they were con- 
ducted recklessly and dishonestly. Lara^e 

The national _ "^ . 

banking quantities of notes were issued by banks 
sysem. ^^^^ ^^^ ^^ intention of redeeming them. 

In 1814, 1837, and 1857 there were general bank sus- 
pensions throughout the country. The first and second 
Banks of the United States issued notes which were kept 
convertible into coin. Gradually, in the older and more 
conservative states, restrictions were placed on the issue 
of bank notes ; and the banking business began to be 
honestly conducted. In 1860 it had been placed on a 
sound and honest basis in the northern and eastern 
states. In 1863 and 1864 Congress established the 
national banking system, and allowed national banks to 
issue notes upon the following conditions : — 

1. A Comptroller of the Currency was placed in 
charge of the administration of the banking laws. 
Each bank was required to report its condition to him 
five times annually, while examiners were appointed to 
examine the affairs of each institution. 

2. Each national bank must have a capital of not less 
than $25,000, and stockholders are liable for the debts 
of the bank to double the par value of their stock. 

8. A certain proportion of the capital of each bank 
must be invested in registered interest-bearing bonds of 
the United States, deposited in the national Treasury. 

4. On the security of these bonds a bank may issue 



MONETARY HISTORY OF THE UNITED STATES. 297 

notes to an amount not exceeding the par value of tlie 
bonds ; but the Comptroller may require additional 
security if the bonds ever fall below par. 

5. These notes are not legal tender ; but are receiv- 
able for taxes, except for duties on imports, and are 
receivable for payments to any national bank. Each 
bank must redeem its notes on demand in legal-tender 
money. 

6. Banks must deposit in the Treasury a fund equal 
to five per cent of their outstanding circulation. Thus 
the United States undertakes to redeem notes presented 
at the Treasury ; and would do so even if the fund 
proved insufficient, having adequate security in the 
bonds and in a first lien upon the assets of a bank. 
Consequently the notes are practically guaranteed by 
the government. 

7. Each bank must keep a reserve of lawful money. 
In smaller cities a reserve of fifteen per cent of the 
deposits is required. In the "reserve cities" a reserve 
of twenty-five per cent is necessary. Banks in smaller 
cities may deposit sixty per cent of their reserves with 
banks in reserve cities. Banks of reserve cities may 
deposit fifty per cent of their reserves with banks in 
" central reserve cities," that is, in New York, Chicago, 
and St. Louis. 

8. Banks are taxed one-half of one per cent on their 
circulation. The notes formerly issued by state banks 
have been taxed out of existence by a tax of ten per 
cent, which made such issues unprofitable. 

National bank notes have possessed the virtue of 



298 PRINCIPLES OF ECONOMICS. 

being thoroughly uniform throughout the country and 

absolutely safe. Moreover, a strict enforce- 

thenationai ^aent of the law has secured an honest 

banking manasiement of the national banks, as a 

system. 

rule. State and private banks have had to 
make their methods equally safe, under penalty of losing 
business. Undoubtedly the banking business in the 
United States has been greatly elevated as a result of 
the national banking laws. 

§ 186. In 1870, with a view to the future resumption 
of specie payments. Congress began to consider the 
The "Act question of revising the coinage laws. The 
of 18^3." silver dollar had then been out of circulation 
for more than a generation, and was worth 11.027 in gold. 
A committee of experts submitted the draft of a bill 
recommending that the coinage of the obsolete silver 
dollar should be stopped. After considering the subject 
during five successive sessions, in the course of which 
the bill was printed thirteen times. Congress passed an 
act which dropped the silver dollar from the list of 
authorized coins. This provision of the measure aroused 
no opposition, and members of Congress repeatedly 
stated that the intention was to establish legally the 
single gold standard. Yet it has been wrongly charged 
that this measure passed Congress, " secretly," or " in- 
advertently," or even with absolute fraud. 

§ 187. After 1873 silver began to fall in value 

The "Bland- rapidly. In 1876 the gold value of 371.25 

AUisonAct." grains of fine silver was only eighty-nine 

cents. At the same time preparations were being made 



MONETARY HISTORY OF THE UNITED STATES, 299 

for redeeming the greenbacks in gold, and bringing the 
country back to a gold basis in 1879. Then people saw- 
that, if the coinage of the silver dollar had not been 
stopped by the law passed in 1873, the cheapened dollar 
might have come back into circulation and driven out 
gold. Thus arose a demand for the free and unlimited 
coinage of the silver dollar, and the cry was started that 
silver had been "demonetized" fraudulently in 1873. 
Yielding to this agitation, Congress in 1878 passed the 
" Bland- Allison Act." This provided that the United 
States should purchase monthly not more than $4,000,000 
worth of silver bullion and not less than $2,000,000 
worth. The bullion was to be coined into the old 371.25- 
grain silver dollars, and such dollars were made full 
legal tender. Under this act the Treasury always pur- 
chased the minimum amount, and placed 1378,166,793 
in circulation between 1878 and 1890. Contrary to the 
expectation of many people, this amount of silver proved 
to be no more than the business of the country could use 
without driving gold out of circulation, especially since 
the volume of bank notes decreased about 1170,000,000 
between 1882 and 1890. On the other hand, the law 
failed to raise the value of silver, contrary to the claim 
which had been made for it. In 1889 the value of the 
bullion in the silver dollar was only seventy-two cents. 
§ 188. The United States issues gold and silver cer- 
tificates upon deposits of gold and silver 
coins. The gold certificates are of large silver certm- 
denominations, the silver are of denom- 
inations as small as one dollar. These certificates are 



300 PRINCIPLES OF ECONOMICS. 

not legal tender, but are receivable for taxes, and may 
be held by national banks as part of their reserves. 

§ 189. In 1890 the friends of silver pushed the 
" Sherman Act " through Congress, and repealed the 

n.^ ..e.^ '' Bland- Allison Act." The new law re- 

The " Sher- 
man Act" quired the Secretary of the Treasury to 

purchase monthly 4,500,000 ounces of fine 
silver bullion at the market price, which was not to 
exceed $1 for 371.25 grains of fine bullion. The pur- 
,chases were paid for by issuing Treasury notes, which 
were redeemable in coin at the Treasury, and could be 
reissued. These notes were also made legal tender. 
Even these increased purchases of silver failed to raise 
its price, which, after a brief rise, fell to sixty cents for 
371.25 grains of bullion in 1893. The effects of the 
'' Sherman Act " were wholly disastrous. Between 1890 
and 1893, Treasury notes to the amount of 1155,931,000 
were placed in circulation. During the same period the 
net exports of gold exceeded $150,000,000, in spite of 
the fact that our exports of merchandise exceeded im- 
ports very greatly. Apparently the country, by 1890. 
had absorbed about all the silver it could use, so that 
the Treasury notes merely drove an equivalent amount 
of gold out of the United States. In any event, the act 
caused considerable fear that the United States would 
be driven onto a silver basis. Immediately after its 
passage, the banks began to hoard gold, and to pay their 
obligations in paper or in silver. The government's 
revenues were paid almost entirely in paper or in silver 
money, instead of being paid largely in gold as was the 



MONETARY HISTORY OF TEE UNITED STATES. 301 

case prior to 1890. Moreover, the holders of green- 
backs and Treasury notes began to present them at the 
Treasury, and ask for payment in gold. When this was 
done, the government feared to refuse gold and to at- 
tempt to redeem the notes in silver, since such a course 
would have discredited both its silver and its paper 
money. Thus it was compelled to pay out large quan- 
tities of gold, while its revenues were composed chiefly 
of paper and silver. In 1893 such an acute stage of 
panic was reached that the " Sherman Act" was finally 
repealed. 

§ 190. The United States now has the most hetero- 
geneous currency that can be found in any civilized 
country. On July 1, 1906, the stock of 

Heterogeneous 

gold in this country was estimated at character of 
81,432,000,000, — a figure which may be «"^^^^^«"^y- 
somewhat too large. Of this amount, $246,991,000 
was in the Treasury. At the same time there were 
in circulation or in the Treasury the following amounts 
of debased money : — 

United States notes, or greenbacks $346,681,000 

Standard silver dollars or certificates representing 

dollars 554,912,000 

Treasury notes of 1890 7,386,000 

Subsidiary silver coins 118,224,000 

Total .11,027,203,000 

In addition to this, the notes issued by the national 
banks amounted to 8561,112,000. 

In order to prevent the mass of debased money from 
depreciating, two things are necessary : first^ the volume 



302 PRINCIPLES OF ECONOMICS, 

of debased currency must not exceed the quantity which 
the people of the country are prepared to keep in circu- 
Recent lation ; second, tjhe Treasury must always be 

legislation. ^^ ^ position to redeem promptly in gold the 
1354,067,000 of greenbacks and Treasury notes that 
represent its demand liabilities. If this can be accom- 
plished, the business of the country can readily absorb 
the existing quantity of silver and. paper money. The 
"Act of March 14, 1900," is intended to make our 
monetary system more secure. It declares that the 
present gold dollar is the standard of value in the 
United States, and that all other forms of money are to 
be maintained at a parity with gold. Then it sets aside 
1150,000,000 in gold, as a fund for redeeming the green- 
backs and Treasury notes ; and authorizes the Secretary 
of the Treasury, in case of need, to sell bonds in order 
to maintain this gold reserve. So far, the enactment 
is worthy of all praise. It has been thought that this 
law will put a stop to the reissue of notes that have once 
been redeemed, and will thus gradually effect the retire- 
ment of our government paper. But a careful reading 
of the^ somewhat obscure provisions of the law upon this 
point does not justify such a belief. On the contrary, 
it would seem that the law authorizes the reissue of 
redeemed notes for any " lawful purpose the public 
interests may require," except " deficiencies in the cur- 
rent revenues." 1 

1 See Sound Currenci/, vii. 42, 47. Up to July 1, 1904, the Treasury 
had redeemed $623,642,000 of the notes, and nearly all of these had been 
reissued. 



BIMETALLISM, 303 



n. Bimetallism. 



§ 191. Prior to the present century most civilized 
countries made gold and silver legal tender in pay- 
ment of debts. Each nation, by independent National 
action and often with an independent legal i>imetaiiism. 
ratio, sought to keep both metals in circulation, and to 
give to debtors the option of paying debts vs^ith either 
gold or silver coins. The usual result of such attempts 
was that one metal or the other went out of circulation 
as often as a change in the market ratio of silver and 
gold bullion cheapened one kind of coin or the other. 
The experience of the United States after 1792 or 1834 
illustrates the usual results of " national bimetallism," 
the term applied to such attempts of individual nations 
to make both gold and silver circulate at a fixed ratio. 

§ 192. In 1816 England debased her silver coins, 
made them legal tender only for small payments, and 
made gold the sole legal-tender money. In qqi^ njono. 
1871 and 1873 Germany estabhshed a na- metamsm. 
tional gold coinage, and withdrew most of the old silver 
coins that had formerly circulated in the various Ger- 
man states. In 1873 the United States relegated silver . 
to a position as subsidiary currency. Meanwhile the 
world's annual production of silver was increasing from 
i about 30,000,000 ounces in 1860 to 78,775,602 ounces 
, On an average for the period 1876-1880. At this time 
France and a few other countries, which formed the Latin 
I Monetary Union, still held their mints open to the 



804 PRINCIPLES OF ECONOMICS. 

free coinage of silver at the ratio of 15.5 to 1. Silver 

cheapened so greatly that it began to flow in large 

quantities to the French mints, and France became 

afraid that all her gold would be soon replaced by the 

cheaper silver coins. In 1876, when the market ratio 

of silver to gold had fallen to 17.88 to 1, the French 

mints were closed to silver ; and the coinage of the 

white metal ceased. Since then, Austria has passed 

from a depreciated paper currency to a gold basis, and 

other countries have shown a desire to adopt gold 

monometallism. The present century, therefore, has 

seen a decided drift toward the adoption of a single 

gold standard by civilized countries. 

§ 193. Most of the countries of Asia and of South 

America have the single silver standard. Since 1893, 

however, the mints of India have been closed 
Silver ' 

monometai- to the further coinage of silver. At the 
present writing news comes of the practical 
acceptance of the gold standard by Japan, through the 
adoption of a legal ratio of 88.33 to 1. 

§ 194. Within the last thirty years the scheme of 
international bimetallism has often been proposed. Its 
International advocates have usually admitted that na- 
bimetaiusm. tional bimetallism is impossible, and results 
in the exclusive use of the cheaper metal. But they 
claim that, if the principal nations of the civilized world 
should agree to make both metals legal tender at a fixed 
ratio, and should allow free coinage of both under such 
conditions, it would be possible to keep both metals in 
concurrent circulation. On this proposition scientific , 



I 



BIMETALLISM. 305 

authorities are divided at the present time. It will be 

necessary to review the arguments advanced for and 

against international bimetallism. 

§ 195. It is claimed that bimetallism is desirable 

because it would give a more stable unit of money than 

either gold or silver monometallism could 

The desira- 

secure. The world's stock of both of the trntyof 
precious metals is so large that a change in ^""^*^^®™* 
the production of one would not greatly affect the value 
of the whole mass. Under monometallism, a change in 
the production of the money metal more quickly affects 
the value of that metal. Moreover, with bimetallism, 
an increase in the production of one metal might be 
offset by a decrease in the production of the other. 
This claim is correct, provided that it can be proven 
that it is possible to hold the two metals together at a 
legal ratio. 

Bimetallists formerly made much of the fact that there 
had been a general fall of prices in all gold standard 
countries from 1873 to 1896.^ This fall, bi- Bimetauist 
metallists argued, had injured debtors by in- fromthefau 
creasing the burden of debts; moreover, it had of prices, 
seriously depressed industrial enterprises. The bimet- 
allists attributed the fall of prices to the fact that after 
1873 silver had been " demonetized " in many countries. 
The principal commercial nations, by adopting the single 

1 For the index numbers from which the fall of prices is ascertained, 
see Fisher, Appreciation and Interest, 98-100; Taussig, Silver Situation, 
91-92 ; Atkinson, Bimetallism in Europe, 602, 633. Also a Bulletin on 
" Movement of Prices, 1840-1894," published by the Bureau of Statistics, 
Treasury Department, Washington, 1895. 
20 



306 PRINCIPLES OF ECONOMICS. 

gold standard, had increased the demand for gold, and 
raised its value. Obviously enough, the steady rise 
of prices since 1897 has destroyed the force of this 
argument. 

Gold monometallists attributed the fall of prices to 

improvements in production that had decreased the 

„ , ^ cost of producina; commodities. But this 

Reply of r & 

gold mono- did not change the fact that the ratio in 
which gold exchanged for commodities had 
altered, and that the purchasing power of gold had 
risen. It did, however, make it probable that falling 
prices had been due to an increasing supply of commod- 
ities more than to an absolute decrease in the supply 
of gold money. Gold had become more scarce, not 
absolutely, but relatively to the larger production of 
commodities. This had diminished the injury that had 
been done to debtors. Prices might liave fallen, but new 
methods and appliances had yielded a larger product; 
so that about the same money return had been secured 
from a business enterprise. This consideration had 
force when applied to industries where new methods 
had been introduced, but did not lessen the burden laid 
upon a debtor whose business had not been affected by 
improvements. Finally, monometallists said that debts 
were contracted in money, not in commodities nor in 
general purchasing power. From 1850 to 1873 prices 
had risen ; since 1873 they had fallen ; in a few years 
they might rise again. Such changes were a part of 
the risk incurred by persons who entered into long- 
time contracts, and might occur under bimetallism. In 



BIMETALLISM. 307 

anj case, we ought not to interfere with past contracts. 
We may admit this, and yet may insist that it is ad- 
visable to lessen the risks of changes in prices that may 
Sbi^GGt future contracts. 

Bimetallists urged that the world's stock of gold was 
not sufficient for the money demand of the world, and 

that ffold monometallism must lead to a . 

° Arguments 

continued fall of prices. Geological condi- from the 
tions were such that " we must expect in the insufficiency 
future a scarcity of s-old and an abundance of the world's 

•^ ° stock of gold. 

of silver, and the extension of the gold 
standard to all civilized states is impossible." Between 
1870 and 1890 the annual production of gold had aver- 
aged hardly more than 5,200,000 ounces, with a value of 
about $108,000,000. The annual consumption of gold in 
the arts in civilized countries has never been estimated 
at less than 160,000,000. Besides this, a large quantity, 
estimated by the highest authority as not less tlian 
120,000,000, had been exported annually to the semi- 
civilized countries of Asia and Africa, where it was 
hoarded or used for ornaments. This left only about 
125,000,000 of gold for making good the loss of existing 
coins by abrasion, and for supplying the needs of in- 
creased trade.^ 

The force of this argument of insufficiency in supply 
is weakened by the phenomenal increase of Recent gold 
the gold output since 1890, as shown by the Production, 
following table, on page 308 : — 

1 For statistics on these points, see Soetbeer's tables, in Atkinson, 
Bimetallism in Europe, 604-528. 



308 



PRINCIPLES OF ECONOMICS. 



Year. 


Fine ounces 
produced. 


Value of Product. 


1890 
1895 
1900 
1902 
1903 
1905 


5,749,000 
9,641,000 
12,315,000 
14,354,000 
15,768,000 
18,243,000 


$118,848,000 
199,304,000 
254,576,000 
296,737,000 
325,961,000 
377,135,000 



For 1905 a preliminary estimate shows a product 
even larger than in 1904, and the prospect is that the 
next few years will see equally large outputs. The 
largest average annual product ever before known was 
6,486,000 ounces, produced between 1856 and 1860. 
The value of the gold output alone is larger now than 
the combined values of the annual gold and silver out- 
put from 1871 to 1875, when silver was " demonetized." 
This is shown in the following table, in which the silver 
product is valued at the ratio of 16 ounces for 1 ounce 
of gold : — 



^ Year. 


Silver. 


Gold. 


Total. 


1871-1875 ) 
Annual average ) 
• 1908 
1905 


$81,864,000 


$115,577,000 

325,961,000 
377,135,000 


$197,441,000 



Improvements in the art of producing gold from 
poorer ores, stimulated by the late appreciation of 
gold, are likely to make the product large for many 



BIMETALLISM. 309 

years. In the remote future it may decrease again ; 

but, for the present, arguments drawn from the scarcity 

of gold have lost whatever force they possessed before 

1890.1 

Bimetallism is declared to be desirable because it 

would establish a fixed par-of-exchange between all 

countries. An English merchant trading Arguments 

with a silver standard country has to sell ^^r a fixed 

*' par-of- 

at silver prices. He receives payment in exchange, 
bills drawn in terms of silver, and the gold value of 
these silver bills may vary between the time that goods 
are sold and the time that they are paid for. Such 
fluctuations introduce an element of uncertainty and 
speculation into legitimate trade between gold and silver 
standard countries. If gold and silver were held 
together at a fixed ratio by international bimetallism, 
then this element would be eliminated from the trade 
with silver-using nations. This may be admitted to be 
desirable. 

§ 196. The crucial consideration concerning bimetal- 
lism is the question of its practicability. Bimetallists 
urge the following arguments : — 

1. If the principal nations of the commercial world 
should agree to allow free coinage of gold and silver at a 
fixed ratio, say 16 to 1, both metals could be kept in 
concurrent circulation. If either should cheapen, there 

1 Index numbers show that from 1890 to 1897 prices in America fell 
from 112.9 to 89.7. By 1900 they had risen to 110.5; in 1903 they rose 
to 113.6 ; and in 1906 stood at 122.4. 



810 PRINCIPLES OF ECONOMICS. 

would be a general tendency for debts to be paid in 
that metal. The demand for the cheaper metal for coin- 
age purposes would be as large asxthe entire 
tionai bimetal- demand of tlie commercial nations for 
^hi ^^n*^^" money. This demand would raise the value 
economic of the cheapened metal. On the other 

hand, the demand for the dearer metal 
would fall in proportion as the demand for the cheaper 
increased. World-wide changes in demand would, there- 
fore, restore the parity of the two metals at the legal 
ratio. 

2. This plan differs from national bimetallism since, 
under the latter policy, the dearer metal could be 
exported to either gold or silver standard countries 
where it would be in demand ; while the cheaper metal 
would gradually flow from the countries that produced 
it to the mhits of the nation that overvalued it. With 
international bimetallism, if gold should become dearer 
than silver at the legal ratio, it could not be exported to 
any countries where the demand for it would maintain 
its higher value. This is because all the principal com- 
mercial nations, now on the gold standard, are supposed 
to be in the bimetallic league. If one or two should 
refuse to enter, they would have to maintain the value 
of gold by their individual demands. 

3. Bimetallists assert that the experience of France 
from 1803 to 1874 illustrates the practicability of their 
policy. During that period France admitted both gold 
and silver to free coinage at the ratio of 15.5 to 1. 
From 1803 to 1850 silver was usually slightly cheaper 



BIMETALLISM. 311 

than gold at that ratio, while from 1850 to 1873 the 
case was reversed. In every year but one, both metals 
were offered at the French mints for coinage ; although 
the silver coinage exceeded gold from 1806 to 1850, and 
gold exceeded silver from 1850 to 1873. Conditions at 
the present day would not be so favorable for another 
experiment with national bimetallism. Prior to 1873 
some countries of Europe used silver and others gold, 
so that the strain on the French system was lessened. 

§ 197. Gold monometallists have often showed that 
national bimetallism has regularly proved a failure, — 
even France feeling obliged to change her me position 
policy in 1876 on penalty of losing her gold, mono'metl 
But such arguments fail to touch interna- lists, 
tional bimetallism. More pertinently, monometallists 
argue that international bimetallism means, at the 
present day, the attempt to make gold and silver legal 
tender at some such ratio as 15.5 to 1, 16 to 1, or 20 to 
1. These ratios all overvalue silver, for the actual 
market ratio is now 30 to 1 or 31 to 1. Monometallists 
say, therefore, that the results of international bimetal- 
lism can be determined by asking, What would happen 
if the governments of leading nations should attempt to 
make gold and silver legal tender at a ratio that over- 
valued silver ? Their answer is that gold, the dearer 
metal, would quickly cease to be used as legal-tender 
money ; and silver would become the sole legal-tender 
money in circulation. They deny that gold would fall 
in value the moment it ceased to be demanded as legal 
tender. It would be used first as a commodity, in 



812 PRINCIPLES OF ECONOMICS. 

which use its utility would be unaltered. Second, it 
would circulate in payment of debts at a premium over 
the legal value placed upon it at the mints. Mono- 
metallists recognize that governments can compel cred- 
itors to receive cheap silver money for past debts, but 
deny that the commercial world can be forced by law to 
use it in future payments. Gold has gradually dis- 
placed silver as the medium for the largest commercial 
transactions because of its superior convenience. At 
the present time the commercial world dislikes and dis- 
trusts silver, and would refuse to make future contracts 
in that money. Consequently gold would be demanded 
for future payments, and future contracts would be 
made in terms of ounces or grains of gold. In other 
words, monometallists insist that the commercial world 
would choose its own money in future payments, with- 
out regard to legal-tender laws. They assert that the 
laws making gold legal tender have little power to affect 
its value, since it would be used as money by the com- 
mercial world without such legislation. The law should 
recognize this fact. In any case legal-tender laws 
would, in the end, prove powerless to overcome this 
preference. Thus international bimetallism would fail 
at the outset. 

§ 198. Tlie practicability of bimetallism turns finally 

on this last point raised by the gold monometallists. If 

Concluding ^^ international agreement should induce 

considerations, ^j^g business world to make future contracts 

in either gold or silver at a fixed legal ratio, then it is 

probable that the changes in the demand for the two 



BIMETALLISM. 313 

metals would maintain them at a parity for a long time 
at least. But, if the commercial world should refuse to 
make future contracts in the bimetallic standard, the 
outcome would depend upon whether this demand of 
business circles should prove sufficient to maintain gold 
at a ratio higher than that fixed by law. It seems im- 
probable, however, that there should be sufficient dis- 
crimination against silver to produce such a result. 
International bimetallism could hardly be adopted un- 
less the commercial interests of leading countries should 
favor it. In the nature of the case, therefore, there 
would hardly be sufficient discrimination against silver 
to maintain the value of gold above the legal ratio. 

§ 199. It is necessary to add that the political diffi- 
culties in the way of an international bimetallic agree- 
ment are considerable. It is doubtful whether „ „^. , 

Political 

such an agreement could be secured in any obstacles to 
near future. More than this, the outbreak 
of war between two of the states of a bimetallic league 
might lead each of the contending nations to make a 
sudden attempt to secure gold, the metal in which most 
reliance could be placed. As a matter of fact, political 
considerations, especially those of a military nature, 
have been partly responsible for the movement of Euro- 
pean countries toward the single gold standard. 



314 PRINCIPLES OF ECONOMICS. 



LITERATUEE OK CHAPTEE X. 

References on the Monetary History of the United States : 

Andrews, Institutes of Economics, 200-217 ; Atkinson, Bimetal- 
lism in Europe; Bolles, Financial History of the United States ; 
Coinage Laws of the United States ; Conant, History of Modern 
Banks of Issue; Dunbar, Theory and History of Banking; Dun- 
bar, Laws of the United States Relating to Currency, Finance, 
and Banking ; Knox, United States Notes ; Laughlin, History 
of Bimetallism in the United States ; Muhleman, Monetary Sys- 
tems of the World ; Report of the Director of the Mint, 1895 ; 
Statistical Abstract of the United States, 1895 ; Sumner, History 
of American Currency ; Sumner, History of Banking in the United 
States; Taussig, The Silver Situation in the United States; 
Upton, Money in Politics; Noyes, Thirty Years of American 
Finance ; Report of the Monetary Commission of the Indianapolis 
Convention, 138-145, 197-223, 398-490, 491-582 ; Watson, History 
of American Coinage ; White, Money and Banking. 

References on Bimetallism : Atkinson, Bimetallism in Europe ; 
Ely, Outlines of Economics, 150-156 ; Fisher, Appreciation and 
Interest ; Giffen, The Case against Bimetallism ; Hadley, Eco- 
nomics, 206-231; Helm, The Joint Standard; Horton, Silver in 
Europe ; Laughlin, Bimetallism in the United States ; Macvane, 
Political Economy, 165-181 ; Muhleman, Monetary Systems of the 
World; Nicholson, Money and Monetary Problems; Report of the 
Directar of the Mint, 1895; Reports of the Monetary Conferences 
of 1878 and 1892; Statistical Abstract of the United States, 1895; 
Taussig, Silver Situation in the United States ; Walker, Inter- 
national Bimetallism, Political Economy, 463-475, Money; Wells, 
Recent Economic Changes, 114-259 ; White, Money and Banking; 
Darwin, Bimetallism; Nicholson, Principles of Political Econ- 
omy, IL 148-163. 



MONOPOLIES AND MONOPOLY VALUE. 315 



CHAPTER XL 

MONOPOLIES. 
1. The Nature of Monopolies. Monopoly Value. 

§ 200. A monopoly exists whenever one person or a 
combination of persons acquires control of the supply of 
"sTcommodity. This control may be secured Definition of 
temporarily by buying up the available sup- monopoly, 
ply, or more permanently by gaining the exclusive or 
nearly exclusive power to produce. A monopoly of the 
first kind will be a temporary affair, because producers 
will increase their outputs in order to profit by the 
higher prices usually fixed by monopolists. With the 
second class of monopolies permanent success is more 
probable.^ 

§ 201. When a single person or combination of per- 
sons controls the supply of any commodity, it is possi- 
ble to control the price. This can be done Monopoly 
by increasing or decreasing the supply so ^^^^^ 
as to induce the public to buy at prices that shall make 
the business as profitable as possible. With freely 

1 Some monopolies have been the sole purchasers of the raw materials 
used by them. Their influence, therefore, has extended to a control of 
the prices at which the producers of the raw materials must dispose of 
their products. Such monopolies have a substantial control of the demand 
for the raw materials. 



316 PRINCIPLES OF ECONOMICS. 

produced commodities no person is able to control the 
supply, hence the price, in this manner. If he reduces 
his output, other producers will extend their sales at 
his expense. He must sell as many goods as can be 
disposed of at prices that leave a profit after paying 
expenses. Thus in competitive industries producers 
will make the largest profits by extending production 
until prices approximate the marginal expenses of pro- 
duction. Now the monopolist acquires tlie power to 
control the supply. Monopoly prices, therefore, will 
not be governed by the forces that control prices of 
freely produced commodities. 

A person may acquire power to fix the price of a 
commodity without controlling all the supply. Re- 
MonopoUsts peated instances have shown that control of 
troi lie entire ^^^^ ^^^^ ^^^ supply may enable a monopo- 
suppiy. list to dictate prices. As Mr. Sidgwick 

says, "a partial control may render possible and prof- 
itable an artificial rise in the price of the commodity, 
even though the remainder is supplied by several sell- 
ers freely competing ; if only the proportion controlled 
is so large that its withdrawal would cause a serious 
scarcity, and thus considerably raise the competitively 
determined value of the uncontrolled remainder." 

Monopoly prices tend to be adjusted so as to yield 
the monopolist the largest net income. In determining 

Monopoly what price will yield the hi2;hest net return, 

prices are ^ "^ '^ 

fixed at tiie the following principles may be recognized : 

estnet return. 1- ^s the monopolist decreases the sup- 
ply, he tends to increase the marginal utility of his 



MONOPOLIES AND MONOPOLY VALUE. 317 

product ; and vice versa. The rapidity with which mar- 
ginal utility varies with changes in supply depends upon 
the character of the demand. The demand for luxuries 
is far more elastic than the demand for necessaries ; so 
that changes in supply affect the marginal utility of 
necessaries more rapidly than they affect the utility of 
luxuries (§ 116). 

2. Certain expenses of production will increase or 
decrease nearly proportionately with each increase or 
decrease of the product.^ Expenses for raw materials 
and common wages are of this character. 

3. Other expenses remain nearly the same whether 
the product is larger or smaller, within certain limits. 
These are fixed expenses (§ 127). 

4. The intelligent monopolist, desiring to secure 
the maximum net revenue, will disregard any expenses 
that are fixed ; and will consider, first, the quantity of 
his product demanded at various prices, and second, the 
variable expenses for each unit of supply. Suppose 
that the fixed annual expenses of a street railway com- 
pany for interest on borrowed capital, for salaries of 
principal officials, and for other outlays that do not 
vary with the amount of business transacted, are 
$40,000. Suppose that the variable expenses amount 
to two cents for each passenger carried. Then suppose 

1 In some cases these expenses will increase more than proportion- 
ately when the supply is increased beyond a certain point. This is true 
of industries in which the point of diminishing returns is quickly reached, 
so that the increased supply of raw materials has to be produced on new 
lands that offer poorer advantages. Sometimes a supply can be some- 
what increased without increasing the variable expenses proportionately. 



318 



PRINCIPLES OF ECONOMICS. 



that, at a fare of ten cents, 600,000 passengers will be 
carried in the course of a year ; and that each reduc- 
tion of fares brings a larger traffic, as represented in the 
table given below. The effect of each change of fare upon 
the net revenue of the company will be as follows : — 



Fare. 


Passengers 


Total 


Variable 


Net 


Fixed 


Net 


Carried. 


Earnings. 


Expenses. 


Earnings. 


Expenses. 


Revenue. 


10 


600,000 


$60,000 


112,000 


148,000 


140,000 


$8,000 


8 


800,000 


64,000 


16,000 


48,000 


40,000 


8,000 


6 


1,400,000 


84,000 


28,000 


56,000 


40,000 


16,000 


5 


2,000,000 


100,000 


40,000 


60,000 


40,000 


20,000 


4 


2,500,000 


100,000 


50,000 


50,000 


40,000 


10,000 


3 


4,000,000 


120,000 


80,000 


40,000 


40,000 





5. The intelligent monopolist will not charge the 
highest prices that he could compel any consumer to 
pay. He will lower prices whenever the increased de- 
mand will more than counterbalance the reduction of 
rates and the increase of variable expenses. In our 
illustration, five cents is the fare that yields the largest 
net returns. Furthermore, the fixed charges have no 
influence upon the prices. If a fixed tax, say of 
$10,000 a year, should be exacted, the fare would not 
be raised ; for such a course would diminish the net 
earnings out of which all fixed charges must be paid, 
and the tax would come out of the net monopoly 
revenue. On the other hand, a variable tax, say of one 
cent for each passenger, would increase the variable 
expenses so that a fare of six cents would yield the 
largest net returns. Taxes on the net revenue of 
monopolies cannot be shifted. 



CLASSES OF MONOPOLIES. 319 

II. Classes of Monopolies. 

§ 202. A monopoly may originate in the possession 
of rare personal faculties and acquii^ments. Every 
free person has exclusive disposal of his i. personal 
natural or acquired powers ; but if many ^biuties. 
other people possess the same faculties in an equal de- 
gree, no one can have a monopoly, that is, a control of 
the supply of the services that his personal abilities 
enable him to render. On the other hand, exceptional 
ability that very few other people possess confers upon a 
person a substantial monopoly in the field in which his 
talents lie. A famous singer, an exceptional physician, 
an author of peculiar talent, or a business manager of 
unusual ability may enjoy a partial or nearly complete 
monopoly of the supply of valuable services. 

§ 203. Other private monopolies are created by law. 
Formerly kings granted to private individuals monopo- 
lies of many trades and manufactures in 2. Legal 
return for payments to royal treasuries. At ^^prfyate 
the present day patents and copyrights are monopoues. 
forms of legal monopolies. These are intended to pro- 
mote invention and the arts by securing to inventors 
and authors exclusive rights to their products for a 
limited period of time. Giant monopolies have been 
created behind patent rights, as the telephone monopoly 
in the United States. 

Governments may create public monopolies of certain 
industries for the purpose of deriving revenue from such 
sources. Fiscal monopolies of this character still exist 



320 PRINCIPLES OF ECONOMICS. 

in Europe, where the manufactures of tobacco, salt, 

Legal and matches are carried on exclusively for 

^°5^^^f- the profit of various governments. The 

monopolies. United States has a monopoly of the postal 

business, — a monopoly, however, which is not made a 

source of revenue. 

§ 204. The use of land, of mines, or of water privi- 
leges, is necessary to production. Some of these nat- 
ural agents are narrowly limited in sup- 
3. Natural i i -j. • ^ • i. 

monopoues. plj ; ^ence it IS easy, so long as private 

a. MonopoUes ownership is allowed, to monopolize them, 
of location. ^ ' , 

Practically all of the anthracite coal of the 

United States is found in a small area in Pennsylvania, 
and it has been possible for the ownership of these coal 
fields to pass into the hands of a monopoly. Similarly, 
the petroleum fields are in process of monopolization. 
Water powers, facilities for irrigation, and docks giv- 
ing access to navigable waters are often monopolized. 
Steam railroads sometimes possess terminal facilities in 
large cities that cannot be duplicated, and therefore tend 
to create monopolies. In some instances street railroads 
have been granted locations in peculiarly desirable streets, 
so that they monopolize the larger part of the business of 
their cities. Steam railroads, when granted rights of 
way through mountain passes or narrow river valleys, 
possess practically exclusive channels of communication 
between different sections of a country. In these cases, 
monopolies control the supply of commodities or services 
on account of exclusive advantages of location. 

A second group of natural monopolies originates in 



CLASSES OF MONOPOLIES. 821 

the necessity of consuming products or services in con 
nection with the plants from which they are Natural 
supplied. Gas, water, and electric light can ^^Mon^dies 
be supplied to consumers only by extending duetocon- 

, . , , , ,1 sumption of 

pipes and wires to places where the com- products in 

modities are used. Such things can be se- ^°^^^^°^ 

° witn tne 

cured only from companies owning plants plants, 
in the immediate locality where consumers live. The 
same is true of steam and street railroad facilities. 
Such services cannot be supplied by all producers, and 
cannot be imported from another city except by exten- 
sion of the plants. It follows that, if two gas or electric- 
light or water companies attempt to compete for the 
trade of a particular locality, a large part of the capital 
fixed in the rival plants will be needlessly duplicated 
One company can supply the entire demand of a city far 
more cheaply than two can do. The same is true when 
parallel lines of railroad compete for the traffic between 
two cities. Between such points one company can give 
better and cheaper service than two. Whenever compe- 
tition is tried in these businesses, the rival companies 
combine sooner or later to form a monopoly. It will be 
difficult for readers to find cases where effective compe- 
tition has been maintained permanently in the water, or 
gas, or electric-lighting business. The same is true of 
the telegraph or telephone business, while parallel rail- 
roads have usually been combined. In these natural 
monopolies, it has generally proved that competition re- 
sults in economic waste through needless duplication of 
plants ; that competing companies cannot give as cheap 

21 



322 PRINCIPLES OF. ECONOMICS. 

and satisfactory service as a single company ; and tliat 
the usual outcome is the formation of a monopoly. 

§ 205. During the last twenty years the business 
world has been startled by the growth of giant monopo- 
4. Capitalistic ^^^^ ^^ many industries that do not ap- 
monopoHes. parently fall under any of the classes of 
undertakings previously described. There is hardly an 
important industry in which attempts have not been 
made to establish combinations.^ 

The simplest attempts to form monopolies consist of 
agreements between a number of producers to limit the 
product, to maintain fixed prices, or to ap- 
organization. point common sclling-ageuts. These agree- 
poois,and ' ments are seldom lived up to, and mutual 
trusts. suspicion among the members generally 

breaks them up. Yet a " friendly agreement " between 
four large beef packers in Chicago has sufficed to build 
up a practical monopoly of the cattle and meat business 
of the United States. In other cases, where the number 
of parties to the agreement has been small, this form of 
combination has created virtual monopolies. A second 
and more formal organization is the " pool." This is 
established by a formal agreement to maintain prices, in 
which the parties agree to divide the territory, to divide 
the business, or to divide the earnings. Pools have been 
common in the railroad business, but have existed else- 
where, as in cases where nominally competing gas com- 

1 See Von Halle, "Trusts," 328-337 ; Lloyd, " Wealth against Com- 
monwealth," Appendix, — for partial lists giving about four hundred at- 
tempts to form monopolies. 



CLASSES OF MONOPOLIES. 823 

panies agree to serve separate districts in a city, and not 
to encroach upon each other's territory. Pools have 
often enough been broken up by the mutual distrust of 
the members ; for, if one party to the pooling agreement 
breaks it while the others keep their promises, he may 
make large profits. This difficulty is intensified in this 
country because tlie courts have refused to enforce pool- 
ing contracts, regarding them as in restraint of trade 
and opposed to public policy. In a third form of com- 
bination, the trust, monopolists finally secured perma- 
nent understanding and union of interests among all 
members. Trusts were formed by having competing 
corporations place a majority of all their stock in the 
hands of a board of trustees. These trustees managed 
the business of the several corporations, and secured 
harmony of action. The original stockholders received 
trust certificates in exchange for their stock, and re- 
ceived dividends proportionate to the certificates. The 
Standard Oil Trust, formed in 1882, was the earliest and 
most successful trust. Courts finally decided that cor- 
porations had no right to surrender their stock to trus- 
tees, such action being ultra vires. Between 1888 and 
1892 many states passed " anti-trust laws," and Congress 
placed such an act upon the statutes of the United States. 
This hostility of the courts and of public opinion led to a 
formal dissolution of trusts. But dissolution meant 
simply a change of form. In some cases, one large cor- 
poration bought out the smaller corporations composing 
the trust. In others, a few large corporations were 
formed, in each of which the original monopolists owned 



324 PRINCIPLES OF ECONOMICS. 

a majority of the stock. The Standard Oil Combination 
until 1899 operated in this form. 

The formation of monopolies in nearly all industries 
has been attributed to the influence of modern capital- 
istic production ; hence the name capitalistic 
Hature of ^ ' -^ 

capitalistic monopolies. The striking facts of modern 

monopo es. jjQginess are the growth of large capitals and 
the concentration of production (§ 100 to § 103). It is 
alleged that the formation of monopolies in industries 
where large fixed capitals are required is the natural re- 
sult of the forces that have led to the replacement of 
small establishments by large enterprises. 

III. General Considerations Concerning Modern Monopolies. 

§ 206. Combinations of various sorts, enjoying partial 

or nearly complete monopolies, are attempting to control 

„ ^ , , the national markets for sugar, matches, 
Extent of ° ' ' 

monopoly starch, beef, flour, alcohol, tobacco, crackers, 
coal, petroleum, cotton-seed oil, linseed oil, 
glass, paper, rubber, leather, steel rails, wire nails, tacks, 
shovels, chains, anthracite coal, and other products ; 
while local monopolies exist in many other industries. 
In the field of the natural monopolies there are tele- 
graph, telephone, and express monopolies, organized on 
a national scale ; while the gas, street railway, water 
supply, and electric-lighting industries are given up to 
local monopolies or operated as municipal enterprises. 
The consolidation of railways is rapidly throwing the 
control of the national highways into the hands of a few 



I 



CLASSES OF MONOPOLIES. 325 

great railroad systems. We must realize, therefore, that 
monopoly is one of the common facts of modern busi- 
ness, and that its influence for good or for bad reaches 
into nearly all branches of economic activity. 

§ 207. Most of these combinations possess several of 
the elements that produce monopolies. The Standard 
Oil Combination claims to have valuable 

Complexity- 
patents that have cheapened and improved of these 

its products, and possesses elements that ™°"°^° 
make it a legal monopoly. Also it claims to have real- 
ized all the economies that come from production on a 
large scale, and so would be considered a capitalistic 
monopoly. Again, it has been greatly aided by its ex- 
clusive control of the pipe lines that conduct oil from the 
oil fields. Since the oil fields are limited natural agents, 
the possession of the pipe lines introduces elements of 
natural monopoly. These features are common to most 
monopolies. 

§ 208. Many natural monopolies have been given ex- 
clusive franchises that make them legal monopolies as 
well as natural. It^has been denied that the _ ,, ,^^ 

Denials of the 

other combinations are monopolies, since existence of 
they do not possess any legal grants of ex- 
clusive privileges. But such a denial rests upon a nar- 
row definition that confines monopoly to the meaning of 
a legal monopoly. Even then, a patent right would be 
admitted to be a monopoly privilege ; and most combina- 
tions are intrenched behind patents. But the real test 
of a monopoly is the power to control the supply, and this 
originates in other causes besides exclusive legal grants. 



326 PRINCIPLES OF ECONOMICS. 

§ 209. An absolute monopoly, or absolute control of 
supply and prices, seldom or never exists. The power 
Absolute mo- of the monopolist is limited, first, by the fact 
siwfLmost' *^^^ ^^^^ often possible for consumers to find 
cases. substitutes for the monopolized commodity. 

The possibility of using oil limits the power of the gas 
monopoly, and the alternative of using other foods would 
limit the power of a flour monopoly. If the article 
monopolized is not a necessary, people might cease to 
use it at all, and thus an increased price might be un- 
profitable. Finally, every monopoly is threatened con- 
stantly by investments of new capital in the business 
which it controls. As prices are raised, inducements 
for outsiders to invest capital are increased. It often 
pays better to keep prices from becoming so high as to 
tempt outside capitalists. 

IV. The Problem of Natural Monopolies. 

§ 210. Disinterested writers practically agree that 

permanent competition is impossible in industries that 

impossibiuty ^^<3 natural monopolies. The reasons have 

of competition j^^gj^ made clear, and it remains to refer 

m natural 

monopolies, to the public policy that should be pursued 

in respect to these undertakings. 

Those who are interested in water, gas, street railway, 

electric lighting, and railroad companies sometimes urge 
Private own- *^^^ private ownership generally works well, 
ersMp and and is the best policy for the future : that 

pubUc control. r j 

the law should leave private companies alone, 
since it is for the interest of the owners of such property 



NATURAL MONOPOLIES. 327 

to give the best service at reasonable prices. But the 
public has found that these industries usually become 
monopolies, and that there have been many abuses in 
their management. Such enterprises prove very profit- 
able in the long run, and become more valuable with 
every increase of population and public wealth. Expe- 
rience shows that private companies usually keep rates 
at the point that yields the highest net returns, and 
conceal the large profits by means of stock watering. 
Now, such monopolies depend upon franchises secured 
from the public, and people are inclined to hold that 
companies receiving valuable privileges should not exact 
monopoly prices and realize enormous profits at the 
expense of the public that confers the right to use streets, 
to lay pipes, etc. Municipalities have begun to regulate 
natural monopolies. The present tendency is to require 
reasonable prices and good service, to prevent stock 
watering and the concealment of profits, and to oblige 
private corporations to pay for valuable franchises. This 
tendency is of recent development, and too often valuable 
franchises have been given away to private companies 
that have oppressed the public. 

§ 211. Many authorities favor public ownership of 
natural monopolies. Such writers call attention to the 

notorious corruption of citv and state officials 

^ -^ The policy 

by private corporations desiring to secure ofpubUc 
franchises. They demonstrate that enor- °^"®^® ^* 
mous wastes have occurred through allowing rival 
companies to duplicate business plants, and that usually 
the competing companies have consolidated and formed 



328 PRINCIPLES OF ECONOMICS. 

monopolies. They show that the monopoly prices charged 
by private companies are often excessive, and form a 
public burden. Therefore, they hold that sound policy 
requires that we should recognize competition to be 
impossible in these industries ; that municipalities should 
assume ownership of these enterprises as fast as possi- 
ble ; and that such a policy would diminish the political 
corruption that threatens the governments of all the 
municipalities of the country. 

To this the advocates of private ownership object that 
public ownership is socialistic ; that city governments 
Arguments cannot manage business enterprises success- 
OTivatT** Mly j and that poor and expensive service 
ownership, would result. The charge that municipal 
ownership is socialistic is as true as the charge that 
municipal ownership of streets, parks, and sewers is 
socialistic. The public cares nothing about the name 
used to characterize municipal ownership, but will con- 
sider the results. Many cities own water works, parks, 
public libraries, and many other institutions that are 
socialistic ; and find such a policy beneficial. The second 
charge is important. Under inefficient methods that 
often prevail in our city, state, and national govern- 
ments, public ownership would prove less efficient 
than private ownership at its best. Yet there is no 
need of municipal management proving inefficient if 
people seriously desire to secure efficient municipal 
governments. 

Many European cities manage successfully local mo- 
nopolies. In this country hundreds of municipalities own 



NATURAL MONOPOLIES. 829 

their water works, and manifest a desire to extend public 
ownership. Gas works are owned by a few Experiments 
cities, while municipal ownership of electric- ^^^j^ 
lighting plants is more common. The results ownership, 
of public ownership of gas and electric-lighting plants have 
been that some undertakings have been very successful, 
others have proved fairly satisfactory, as much so as 
average private ownership, while some have been poorly 
conducted. Success or failure has usually depended upon 
local conditions, generally upon the possibility of securing 
honest local government. In cities where municipal offi- 
cials are allowed to plunder the public, it is probable that 
municipal ownership would prove less successful. It has 
been demonstrated that natural monopolies are usually 
enormously profitable when private companies are allowed 
to fix rates, while municipal ownership furnishes lighting 
facilities at lower prices than private companies usually 
charge. Little has been done in the direction of public 
operation of street railways in this country. Advocates 
of public ownership hold that at present it may be 
advisable for municipalities merely to limit franchises for 
street railroads to periods of twenty or thirty years, and to 
make private companies pay a fair return for the privi- 
leges granted them, or reduce fares to about a three-cent 
basis. Large cities could undoubtedly pay a large part of 
their expenses out of the receipts from public franchises, 
or could insist upon material reductions in the prices 
charged by natural monopolies. Under municipal opera- 
tion the tendency might be to reduce fares at the expense 
of revenue. 



330 PRINCIPLES OF ECONOMICS. 

Steam railroads are natural monopolies, since they 

enjoy monopolies of location, and since their services 

must be used in connection with their plants. 
The case of , , *■ 

steam Competition is possible only at compethig 

points reached by more than one line of 
road. But railroads possess also the characteristics of 
capitalistic monopolies since they require heavy invest- 
ments of fixed capital, and therefore make it possible to 
effect savings by combining small roads. Public owner- 
ship of railroads presents many more difficulties than 
municipal ownership of local monopolies. But experi- 
ence shows that private ownership results in serious 
evils. The chief of these have been, dishonest manage- 
ment by a ring of speculators, stock watering and over- 
capitalization so great as to make it impossible for many 
roads ever to pay interest and dividends on their excess- 
ive capitalization, and discriminations in rates that have 
ruined individuals and localities in the interest of 
favored shippers or localities. Realizing these evils, 
the public has insisted that the states and the national 
government shall exercise control over the transpor- 
tation business. This control has constantly increased, 
and is certain to be enlarged in the future. Apparently, 
the people of the United States intend to try all other 
methods of public control of the national highways be- 
fore attempting national ownership.^ 

1 This subject is treated at greater lepgth in the following chapter, 
and need not be considered further here. 



CAPITALISTIC MONOPOLIES. 331 



V. Capitalistic Monopolies. 

§ 212. Capitalistic monopolies are so numerous and 
powerful that they must be considered a Reasons for 
common feature of the economic life of to- t^^e growth of 

capitahstic 

day. Different reasons have been assigned monopoUes. 
for tlieir growth, and we must consider the explana- 
tions advanced. 

Often it is said that modern competition has become 
fiercer than ever before. The growth of large capitals 
narrows the competing parties down to a The wastes 
few large competitors. Enormous sums are ^fe(.J^^^"°"^ 
spent in advertising and selling goods, so competition, 
that competition produces great wastes in effecting sales. 
A union of competing firms saves these expenses, and 
enables goods to be sold at lower prices. Competition 
does not mean lower prices, for the wastes incurred 
under it oblige prices to be kept at a higher level. 
Furthermore, competition between large enterprises 
often becomes commercial warfare. Competing firms 
sell goods for less than cost in order to crush out com- 
petition and to extend their markets. This cut-throat 
competition sometimes lasts for months or even years. 
In the end smaller concerns are forced to the wall, and 
the large companies remaining combine their forces in 
order to prevent ruinous competition in the future. 
Undoubtedly the desire to stop these enormous losses 
has led to the formation of many combinations. Finally, 
whenever large fixed capitals are invested in a business, 
it is difficult for independent establishments to reduce 



332 PRINCIPLES OF ECONOMICS. 

their outputs whenever the supply becomes so great as to 
lower prices below the point wliere they cover expenses 
of production (§ 127). Such conditions favor the forma- 
tion of combinations, which can reduce the output of 
each establishment, and restore paying prices. 

§ 213. A second explanation of monopolies is that a 
combination can secure all the economies that come 
Economies in fi'om production on a large scale. Some of 
production, ^j^^ greatest monopolies claim that they have 
cheapened the cost of producing commodities. This 
subject has been discussed elsewhere (§ 100 -§ 103). 
Experience proves that large-scale production does lead 
to more economical production ; but it has not yet proved 
that a complete monopoly can secure many material 
advantages in production over independent enterprises 
large enough to secure full efficiency of plant. Some of 
the great combinations have effected economies in pro- 
duction. ^ Yet, independent establishments compete 
with the largest monopolies so effectively that they are 
crushed only by foul means. We have not enough data 
at present to enable a final decision to be formed on this 
question. Whenever the great combinations shall be 
able to make a profit from selling at prices so low as to 
make it impossible for independent producers to compete 
on equal terms, then all will have to admit that monopo- 

1 Monopolies may combine their patents, so that every process is per- 
formed with the most approved appliances. Yet large independent enter- 
prises may at any moment secure new inventions. Monopolies may buy 
their raw materials somewhat cheaper, since they can order very large 
quantities at a time. The student will find these questions discussed in 
the works referred to at the end of the chapter. 



CAPITALISTIC MONOPOLIES. 333 

lies possess greater advantages in the mere work of 
production. Manifestly, however, the possession of supe- 
rior facilities cannot be proven by the fact that monopo- 
lies crush independent producers bj selling at a loss until 
the smaller competitors are ruined. It must be admitted 
that the day of production on a small scale is past. But 
the question is concerning the greater economy of mo- 
nopolies over independent large-scale production. 

§ 214. The growth of the greatest capitalistic mo- 
nopolies has been aided by alliances with natural 
monopolies, especially with railroads. The Aiuancesof 
Standard Oil Combination has always had ""^^^^^^^ ^ 

•^ with natural 

the aid of railroads in crushing competitors. monopoUes. 

Independent refiners were charged higher freight rates 
at first, and the excess over the normal rates was paid 
to the Standard Oil Combination. This was exposed, 
and the contracts with the railroads were ostensibly can- 
celed. But a continuous line of evidence, extending to 
the very month in which this is written, shows that the 
oil monopoly has always received assistance from the 
railroads. So with the dressed-meat combination. A 
Congressional investigation showed, in 1888, that freight 
rates west of Chicago encouraged shipments of cattle to 
that city. After reaching Chicago, the trunk-line asso- 
ciation refused to haul cars of private shippers to New 
York, so that the cattle had to be unloaded at the 
stock yards controlled by the four great packing houses. 
Then the meat combination received a mileage allow- 
ance of nearly $200 per annum on each car used in 
shipping their products to the East. Finally, some of 



334 PRINCIPLES OF ECONOMICS. 

the railroads refused to carry cattle for local butchers 
who would not sell the dressed beef of the great com- 
bination. These are by no means exceptional instances, 
and they show how alliances with natural monopolies 
have served to build up combinations. 

§ 215. The opponents of a protective tariff have 

declared that trusts in the United States have been 

Relation of due to the exclusion of foreign competition 

TeTotective ^y ^^^ ^^^'^^' ^^^^ formation of a monopoly 
tariff. is easier when the possibility of foreign com- 

petition is excluded ; and it is possible to show that 
some combinations have profited in this way. But the 
underlying causes of monopolies reach deeper than the 
tariff, which has been merely one circumstance that may 
have favored their growth. 

§ 216. Much of the opposition to monopolies has 
been due to their unscrupulous and criminal methods 

of crushing competitors, and securing privi- 
Evil methods or? or 

of some leges from the government. Some of them 

monopo es. i^^^q conspired with railroads to prevent 
competitors from using the national highways on equal 
terms. Some have hired agents to destroy the property 
of their rivals. Some have corrupted city officials, state 
legislatures, and courts for the purpose of accomplish- 
ing their ends ; and their sinister influence has been felt 
repeatedly in Congress. Furthermore, the stocks and 
bonds issued by the corporations composing some mo- 
nopolies have been "listed "upon the stock exchanges. 
In many such cases, the managers of the combinations 
have indulged in the very worst practices known to the 



FINAL CONSIDERATIONS. 335 

exchanges, in order to make mone}^ by manipulation o\ 
the stock market. Managers frequently have gambled 
in their stocks to the extent of neglecting the real 
interest of their companies, and have caused infinite 
demoralization in the legitimate work of the exchanges. 
Many honorable men have been connected with combina- 
tions, and it must be distinctly stated that the charges 
above enumerated cannot be brought against all monopo- 
lists. But the evil practices^ of many of the largest 
monopolies have been so flagrant that honest men find it 
difficult to form deliberate and impartial judgments con- 
cerning the economic aspects of combinations. But the 
student of economics must put aside all prejudices, how- 
ever natural and justifiable ; and must consider, coolly 
and impartially, the purely economic advantages or 
weaknesses of monopolies. 

VI. Pinal Considerations Concerning Monopolies. 
§ 217. While it is impossible to forecast the future 
with accuracy, it is possible to emphasize certain facts 
concerning our experience with capitalistic ^^ ..^ .. 
monopolies up to the present moment. It monopoues 
is certain that most attempts in this direc- had absolute 
tion have failed. The unsuccessful monop- <^<'"^°^- 
olistic enterprises have outnumbered the successful, 
while the latter have constantly been confronted with 

1 Readers will find in the Congressional and state investigations of 
trusts, cited at the end of this chapter, an enormous amount of evidence 
relating to these abuses. In recent years much has been written upon 
the subject. Tlie reports of the recently established Bureau of Corpora- 
tions are the best sources of information. 



336 PRINCIPLES OF ECONOMICS. 

new independent enterprises. Only in a minority of 
instances have combinations acquired an effective con- 
trol of prices, while they have never been able to drive 
all independents out of business. 

This has been due largely to the pressure of new 

capital seeking for investment. This is a mighty force 

in the United States. A monopoly must not 

The pressure . ^ "^ 

of capital for Only control a majority of the supply at the 

time it is formed, but must deal with dozens 
of future competitors. Whenever prices have been main- 
tained by a combination at an unusually profitable level, 
new capital has invariably flowed into that business. 
Many of these new enterprises are established with the 
purpose of forcing the monopoly to buy them up at good 
prices. Others find it profitable to sell their products 
at the high prices established by the monopoly, but are 
likely to join the combination in the end. Many of the 
attempted monopolies have aimed solely to limit the 
supply and to raise prices. Such have fallen under 
attacks from new competitors attracted by excessive 
prices. 

The only successful combinations have been those that 
endeavor to effect savings in producing and market- 
Monopolies ^^o *^®^^' products, and to sell at prices that 
and prices. offer less inducement for attacks by outside 
capital. The Standard Oil and the Sugar Refining 
Combinations have reduced the prices to consumers, and 
exhibit statistics to prove this. The student needs to 
remember, however, that the prices of all commodities 
have fallen during the last twenty years, and that the 



FINAL CONSIDERATIONS. 33T 

charges for refining oil and sugar have decreased very 
slightly since the formation of these monopolies. On 
the whole, combinations have prevented their products 
from falling in price as fast as the great mass of com- 
modities. They sell at monopoly prices, that is, prices 
that yield the largest net returns, except when forced to 
lower prices in order to meet or prevent competition. 

§ 218. Some of the opponents of monopolies declare 
that they limit production and raise prices various views 
through the artificial scarcity which they ofSpitaiistic 
create. These opponents consider monopo- monopoues. 
lies to be artificial obstructions to competition, which 
the law should sweep away. 

Other writers hold that capitalistic monopolies arise 
mainly by alliances with natural monopolies. If natural 
monopolies should be controlled by govern- 

C&pllEllStlC 

ment so that the rest of the field of industry and natural 
should be open to all on equal terms, these °^°"°^° 
writers believe that other monopolies could not be 
maintained. 

Other economists take a more favorable view. They 
admit the abuses that arise from alliances of capitalistic 
and natural monopolies, but hold that the Amore favor- 
explanation of the growth of combinations is **^® ^^^' 
that they avoid the wastes of competition and secure 
economies in production. These savings represent a 
gain to society ; and a wise policy will preserve this 
gain, while minimizhig the evils of monopolies. 

Finally, socialists believe that monopolies are superior 
forms of organization that are destined to prevail in all 



338 PRINCIPLES OF ECONOMICS. 

industries. Competition is no longer possible. When 

The view of ^^^ industries fall into the control of giant 

sociausts. monopolies, the government will assume 

the ownership of these combinations. This will mean 

complete socialism. 

These conflicting views present the most difficult prac- 
tical problem that confronts economists. There can be 
Difficulty of ^^^ doubt of the impossibility of competition 
the problem, ji^ natural monopolieSo Therefore, the ques- 
tion of the future of capitalistic monopolies raises the 
entire question whether competition will he possible in 
any part of the business world. This problem is ' be- 
ing pushed to the front by every new combination of 
capital. 

There is no question that a monopoly places imr 
mense power in the hands of the monopolist. Capita 
istic monopolies have proved objectionabk 
that monopoly because they lead to gross abuses, and the 
power will public has as yet no guarantee that monopo- 
lists will not abuse their power in the future. 
For this reason many people favor the immediate aboli- 
tion of all such combinations by law. 

Other writers hold that combinations offer the most 
economical organization of production, and that it is 

unwise and useless to attempt to suppress 
Legal regula- ^ ^ ^ 

tionofmo- them. Society has, however, the right to 

nopo es. regulate monopolies and to prevent irrespon- 
sible abuses of their power. Legal regulations may 
oblige all combinations to furnish a satisfactory supply 
of commodities at reasonable prices. 



FINAL CONSIDERATIONS. Sgg 

Again, it is argued that no combination can suppress 
competition permanently, and prevent it from assuring 
to society ffood service at fair prices. A 

* ^ ^ The persist- 

complete monopoly would not destroy the enceofcom- 

potential competition of new capital at any ^^ °"* 
time when high prices offered a prospect of large profits. 
In the pressure of capital seeking investment we have a 
force that will guarantee^ society from abuses. This 
argument gains force when one reflects that monopolists 
constantly seek opportunities to invest their savings. If 
we conceive of all industry as under the sway of fifty 
gigantic monopolies, then the earnings of each monopoly 
would menace every other with competition the moment 
that prices should be raised unduly. Monopoly earnings 
must be invested in some enterprise that supplies social 
wants ; and the pressure of capital for investment might 
prevent monopolistic abuses. At the present, monopo- 
lists are entering each other's fields of industry. One 
monopolist is investing in match factories, and attacking 
the match monopoly. The leader of the oil combination 
is entering the iron and steel industries. It is urged 
that this pressure of one monopolist upon another will 
surely increase from year to year. 

The three following conclusions, in the judgment of 
the author, are all that can be safely affirmed from 
our present experience of capitalistic mo- conclusions as 

nopolies : — to the growth 

1. Capitalistic monopolies are usually capitaHstic 

complex in character and possess various ™°"°i^^®s- 

elements that produce monopoly. The Standard Oil 



340 PRINCIPLES OF ECONOMICS. 

Combination has certain elements of natural monopoly. 
Patent rights and other elements of legal monopoly are 
to be found in the majority of modern combinations. 
Then, alliances with railroads and other natural monop- 
olies have assisted the growth of some of the largest 
and most powerful capitalistic monopolies in the United 
States. 

2. Looking at the wastes of modern competition, it 
seems clear that combinations save many expenses, 
and more easily contract production whenever prices 
fall. But this does not justify the inference that capi- 
talistic monopolies are inevitable. It merely warrants 
the conclusion that combination offers one method of 
avoiding the wastes of competition. There may be other 
methods of ending these wastes. A higher standard of 
commercial morality, a more moderate business policy, 
and a development of trade statistics that shall make 
possible an accurate forecast of the market would 
change the nature of competition considerably, and 
would terminate many of its worst features at the 
present moment. Monopolies are undoubtedly one rem- 
edy for the present wastes of competition, but it is alto- 
gether premature to conclude that they are going to 
prove the only remedy available in all future times. 
But it is not likely that business conditions and methods 
will undergo any marked change in the immediate fu- 
ture. For this reason we are liable, for some time to 
come, to see capitalistic combinations resorted to as a 
means of avoiding the evils of disordered competition. 

3. Monopolies may realize some economies in produc- 



FINAL CONSIDERATIONS. 341 

tion, but they also entail heavy expenses for supervi- 
sion of their immense interests, while they are likely to 
incur the wastes to which great corporations are subject 
(§ 91). The student must remember that we are com- 
paring monopolies with large-scale independent enter- 
prises, not with small-scale production. It is decidedly 
not proven that the economies in production realized by 
monopolies are so great as, of themselves, to assure to 
combinations future control of all markets.^ 

1 Since the beginning of 1898 the formation of industrial combinations 
has been phenomenally rapid. On April 8, 1899, a financial paper com- 
puted the capitalization of new combinations formed since the first of the 
preceding January at -$1,526,325,000. A recent writer states that in March, 
1899, there were in this country 353 trusts capitalized at $5,832,000,000. 
These include nearly all important branches of manufacturing industry. 
These combinations are greatly over-capitalized, and have been created 
largely for the purpose of disposing of their securities at the high prices that 
have recently prevailed in the stock markets. Usually the issues of bonds 
or of preferred stock have represented all the capital actually invested, and 
sometimes more, since the value of the plants has been estimated at a very 
liberal figure. The common stock represents nothing but the " good will " 
of the businesses, or what is generally known as "water"; and in many 
of these combinations its holders will never be likely to receive any divi- 
dends. In the combinations formed between January 1 and April 8, 1899,. 
the bonds and preferred stock amounted to $603,850,000 ; while the issues 
of common stock reached the figure of $922,475,000. See " Commercial 
and Financial Chronicle," Jan. 7, 1899, March 4, 1899, and April 8, 1899 ; 
" Bradstreet's," Eeb. 11, and 18, 1899 ; " Commercial Year Book of New 
York Journal of Commerce," 1898. 



eS42 PRINCIPLES OF ECONOMICS. 



LITEEATURE ON CHAPTER XI. 

General References : Andrews, Institutes of Economics, 112- 
113; Ely, Economics, 216-217, 295-307; Gunton, Social Eco- 
nomics, 397-414; Hadley, Economics, 150-179; Marshall, 
Principles of Economics, 532-547 ; Newcomb, Political Economy, 
230-240 ; Sidgwick, Principles of Political Economy, 348-365. 

Special References : Adams, The Relation of the State to In- 
dustrial Action, 47-64; Clark, Theorj^ of Economic Progress j 
Clark and Giddings, The Modern Distributive Process, 1-34; 
DoDD, Combinations, Their Uses and Abuses ; Cook, The Cor- 
poration Problem ; Ely, Problems of To-day, 107-146 ; Farrer, 
The State in Its Relation to Trade, 57-119 ; Foote, Law of Com- 
panies Operating under Municipal Franchises ; Hadley, Railroad 
Transportation, 63-145; Hobson, Evolution of Modern Capital- 
isms, 88-166 ; Jeans, Trusts, Pools, and Corners ; Johnson's 
Universal Cyclopaedia, "Monopolies;" Lalor's Cyclopaedia of 
Political Science, "Monopolies;" Lloyd, Wealth against Com- 
monwealth ; Spelling, Treatise on Trusts and Monopolies ; Yon 
Halle, Trusts and Industrial Combinations; Bemis, Municipal 
Monopolies ; Ely, Monopolies and Trusts ; Gunton, Trusts and 
the Public. 

References to Official Investigations of Monopolies : Report 
in relation to the Sugar Trust and the Standard Oil Trust, by 
Committee on Manufactures, 11. of R. ; Report of New York Sen- 
ate Committee on the Investigation Relative to Trusts; Testimony 
Taken by Select Committee of the U. S. Senp^-Q on the Transpor- 
tation and Sale of Meat Products. 

References to Economic Journals : Andrews, " Trusts accord- 
ing to Official Investigations," Quarterly Journal Economics, III. 
118-152; "The Late Copper Syndicate," Q. J. E., IIL 508-518; 
DwiGHT, " The Legality of Trusts," Political Science Quarterly, 
HI. 592-632; Gunton, "Economic and Social Aspects of Trusts," 
P. S. Q., IIL 592-632; Jenks, "Development of the Whiskey 
Trust," P. S. Q., IV. 296-319; " Capitalistic Monopolies," P. S. 
Q., IX. 486-509- 



RAILROAD COMPETITION AND COMBINATION 343 



CHAPTER XII. 

RAILROAD TRANSPORTATION. 

I. Railroad Competition and Combination. 

§ 219. We have already seen that in the United 

States the early railways were built, much as trolley 

lines have been durinoj the last decade, on ^^ ^ ^ 
° ' Character of 

local roads and chiefly by local enterprise early raii- 
(§ 39). The scantiest provision was made 
for through traffic, and it was necessary for a long time 
to transship freight at each terminal point where it 
passed to another line of road ; while passengers were 
obliged to change cars with equal frequency. 

In time, connecting lines were obliged to cooperate 
with each other for the purpose of interchanging business, 
agreements were effected by which through 

° ^ o Beginning 

trains could be run, and fast-freight lines were of railway 

organized to own cars, collect freight, and *^°°^®^^ 

arrange for the convenient dispatch of long-distance 

traffic. Between 1850 and 1870 an i^icreasing degree of 

cooperation was reached by connecting lines, and the 

service which railways could render the country was 

vastly enlarged. In this manner, during the period just 

mentioned, a rapidly growing business between the 

Mississippi Yalley and the Atlantic seaboard was 

developed. ^ 



344 PRINCIPLES OF ECONOMICS. 

In the meantime the combination of short connecting 

roads into trunk lines had begun. In 1853 the New 

York Central was formed by the consolidation 
Trunk lines. ^ , . 

ot the various roads between Albany and 

Buffalo ; and sixteen years later the Hudson River Rail- 
road was added to it, securing a connection with the 
city of New York. A similar process went on elsewhere 
during the fifties and sixties until, by 1870, there were a 
number of railroads that operated from 200 to 1000 miles 
of line. Between the Atlantic seaboard and points on 
Lake Erie and the Ohio River, the New York Central, 
the Erie, the Pennsylvania, and the Baltimore and Ohio 
roads were reaching out for western business ; while in 
the Mississippi Valley various trunk lines had established 
through service between Chicago and the terminals of 
the eastern roads, or had pushed out into the West and 
Northwest and even to the Pacific coast. 

The succeeding step in railway combination was the 
union of eastern roads with those in the Mississippi 
Railway Valley. By purchase or lease, the New York 
systems. Central, the Pennsylvania, and the others 
secured control of lines that gave them entrance into 
Chicago and St. Louis. Thus our first railway systems 
were developed. These consisted of a number of differ- 
ent companies united under a single management and 
operating several thousand miles of road, some of it 
owned in fee by the parent corporation, other portions 
controlled by purchase of stock, others by lease, and still 
others consisting of roads built and financed by the 
parent company for the purpose of rounding out its 



RAILROAD COMPETITION AND COMBINATION. 345 

system. By 1890 some of the largest systems controlled 
from 4000 to 5000 miles of road, consisting sometimes 
of parallel lines, but to ,a larger extent representing a 
union of connecting railways.^ 

§ 220. This process not only increased the size of the 
railways, but it altered materially the character of their 
operations. The orio:inal local lines had „^ _^^ 

^ ^ The growth 

enjoyed a monopoly in their respective dis- ofcompeu- 
tricts, competition being possible only at a 
few points where rival roads met or water transportation 
was available. But the trunk lines could compete with 
each other for through traffic, which had grown to very 
large proportions, and the sharpest rivalry soon devel- 
oped. For a few years prior to 1860 the eastern trunk 
lines were bidding for western business, and their rivalry 
was greatly intensified when, in 1869, the Pennsylvania 
and New York Central secured firm control of Chicago 
connections. '' In 1868 rates from Chicago to New York 
stood at 11.88 per 100 pounds for first-class goods, and 
10.82 for fourth class. In the summer of 1869 they fell, 
under the stress of competition, to a common rate of 
10.25 per 100 pounds on all classes." At that time the 
new charges were ruinously low, and accordingly rates 
advanced to a materially higher level from 1870 to 1874. 
But in the latter year the Baltimore and Ohio secured 
entrance into Chicago, and a Canadian line entered the 
field. Immediately a new period of cut-throat competi- 

1 West of Chicago and St. Louis, however, the great systems radiated 
from these centers, and consisted of a number of arms reacliing out into 
the grain regions, where most of their freight was secured. Cf. Hadlbt, 
Eailroad Transportation, 86. 



346 PRINCIPLES OF ECONOMICS. 

tion began, which carried first-class rates down to 80.25 
per 100 pounds, and fourth-class to $0.16. This war- 
fare was brought to an end in 1877 by the establishment 
of a pool, a device which had already been employed 
in other parts of the country in order to meet similar 
conditions. 

Under the railroad pool the through, or competitive, 
traffic was divided between the various roads in certain 
proportions ; or else, without actually divert- 
ing freight from one line to another, the 
revenue which accrued from competitive business was 
apportioned in some manner that was considered equi- 
table. By this means the inducement to cut established 
rates was partially removed, ^ and freight charges could 
be maintained at profitable figures. The agreement 
formed by the trunk lines in 1877 was maintained with 
more or less success until 1881, when it was broken by 
a dispute concerning the comparative rates charged from 
Chicago to the various eastern seaports. The pool was 
subsequently renewed, and with varying fortunes con- 
tinued until 1887. In other parts of the United States, 
also, similar arrangements were maintained with more 
or less success, so that the general outcome of the 
sharp competition which had arisen about 1870 had 

» Pools did not wholly remove the inducement. They were established 
for definite periods of time, and at their expiration a new allotment of 
traffic or revenue was necessary in order to continue the arrangements. 
Roads dissatisfied witli the amount of business or receipts allotted to 
them would often cut rates secretly in order to increase their traffic to 
a point that would force the pool to grant them a larger allotment in 
the future. 



RAILROAD COMPETITION AND COMBINATION. 347 

been to drive the railroads into that form of combina- 
tion known as the pool.i 

The great weakness of the device arose from the fact 
that the courts held that pooling contracts had the effect 
of restraining trade and were contrary to public policy, 
so that such agreements could have no legal standing and 
could not be enforced as valid contracts. It followed 
that pools could have no more strength than Legal status 
might arise from the appeal which they could <>* the pool, 
make to the interest or good faith of the members. It 
usually proved difficult to satisfy all the parties to pool- 
ing agreements, and some roads, especially the weaker 
ones, were constantly tempted to violate their pledges. 
By means of extra-legal penalties, such as fines, a certain 
amount of discipline was maintained ; and various im- 
provements in organization and management made some 
of the later pools much stronger than the earlier. 

Here matters hung, when, in 1887, Congress passed 
the Interstate Commerce Law which prohibited all pool- 
ing contracts. This action was followed by a pooling pro- 
reorganization of the various railway associa- ^"^ited. 
tions, by which it was sought to eliminate the feature of 
pooling and yet hold the members together in such a 
manner as to prevent a renewal of rate cutting. Traffic 
associations, therefore, under various names and forms 
of organization, maintained their existence ; and endeav- 
ored, with varying success, to prevent disturbances of 
rates. In 1897 the Supreme Court decided that the Trans- 
Missouri Freight Association, formed for the professed 
purpose of "• establishing and maintaining reasonable 



348 PRINCIPLES OF ECONOMICS. 

rates, rules, and regulations," was an illegal combination 
to restrain interstate commerce, such as had been pro- 
hibited by the Anti-Trust Law of 1890. At the time, 
this decision was thought to be a final blow at the rail- 
road pool ; but it appears that traffic associations of one 
sort or another continue to exist and to exercise some 
control over railway rates. 

The earliest of the railway combinations had taken 
the form of unions of connecting roads, or of radiating 

lines that belonged naturally to one parent 
roadconsou- stem. The pool, however, was an attempt 

to secure united action between parallel, or 
competing, railway systems ; it was designed to regulate 
or do away with competition. Prior to 1870 the result 
of combination had been to intensify, or even to create, 
competition ; since that date its consequence has usually 
been to diminish or destroy it. Whether the pool would 
have proved a final adjustment of the relations of com- 
peting lines cannot be determined with certainty, but it 
seems probable that in time various causes would have 
led to the establishment of a closer and more permanent 
union of parallel roads. As it was, however, the law 
of 1887, by prohibiting pooling, turned the attention of 
railway managers to other methods of controlling com- 
petition and accelerated very greatly the process of 
consolidation. The pool was illegal ; but there was 
nothing to prevent one road from securing control of 
a competing line by lease, by purchase of stock, or by 
new methods which were devised. 

In some cases the same group of capitalists secured 



RAILROAD COMPETITION AND COMBINATION. 349 

control of competing lines, without attempting a formal 
consolidation ; in others, different groups of magnates 
effected an interchanore of holdings of stock 

^ . ^ Methods of 

and of directors, thus securing a '' commu- consoUda- 

nity of interest." Finally the device known 
as the holding company was resorted to, and might have 
been very widely employed if the courts had not decided 
that the famous Northern Securities Company, formed 
to hold the stock of the Northern Pacific and Great 
Northern railways, was an illegal combination under the 
terms of the Anti-Trust Law of 1890. How this decision 
will affect certain other liolding companies cannot be de- 
termined at the present time ; but it will not do more 
than retard slightly the unification of railway interests. 
The holding company would have been tlie most popular 
device, since it would have enabled a few magnates to 
control vast properties with the smallest investment in 
their securities. There is nothing, however, to prevent 
capitalists from bringing competing railroads under their 
control, or establishing a community of interest with the 
owners of other great railway systems. 

Prior to 1890, as we have seen, 5,000 miles of line were 
the most that had been brought under the control of a 
single management ; since that date, the com- 

, . . » . ,. , . Results of 

bmation of competing lines has given us great consoUda- 
railway systems that operate from 10,000 to ^°"' 
22,000 miles. In 1902 there were nineteen systems which 
controlled 165,000 out of the 203,000 miles of railroad in 
the United States ; and of these, the eight largest con- 
trolled 129,000 miles, or two thirds of the total mileage 



350 PRINCIPLES OF ECONOMICS. 

of the country. 1 Then, too, more or less close relation- 
ships are known to exist between several of the nineteen 
great railway systems ; so that no less than 82,000 miles 
of road are now controlled by interests which seem to 
have come to an understanding with one another. It is 
a striking fact that, since 1890, consolidation has pro- 
ceeded very largely upon a territorial basis, the purpose 
and result being generally to bring all the important 
roads in any region under one management. Northern 
New England, for instance, falls to one road and south- 
ern New England to another. The Yanderbilt and Penn- 
sylvania systems occupy, respectively, the northern and 
the southern portions of the territory north of the Ohio 
or the Potomac and east of the Mississippi, although at 
some points their lines penetrate each other's fields ; 
below the rivers just mentioned we find two other sys- 
tems which divide most of the traffic of the South ; and 
in the Northwest a close combination of transcontinental 
lines has been effected.^ The same result has been 
reached in other countries where the roads have re- 
mained under private management. This is, perhaps, 
indicative of what the future of railway consolidation is 
to be. It is very probable, indeed, that each section of 
the country will finally fall to the control of a single 
system which will either operate or dominate all the 
important lines of road. 

1 For descriptions and maps of the great railway systems, see John- 
son, American Kailway Transportation, 52-68 ; also The World's Work, 
February, 1902 ; Review of Reviews, August, 1901. 

'^ South and west of St. Louis the situation is not so clearly defined, 
and a number of different systems are yet in existence. 



RAILROAD COMPETITION AND COMBINATION. 351 

§ 221. The general reasons for railway consolidation 

should already be clear to the student who has mastered 

our previous discussion of laro-e-scale produc- „ 

^ or Reasons for 

tion and monopoly. In the first place a rail- consoiida- 
road represents a very large investment of 
fixed capital, and must incur many other charges that are 
fixed and do not vary with the amount of business trans- 
acted. Interest on bonded debt, a large share of the 
taxes paid, salaries to important officials, remain the same, 
whether the amount of business is larger or smaller ; the 
cost of maintaining the roadbed, track, and structures 
will be somewhat greater when the traffic is heavy, but 
will not be increased proportionately, by any means; 
while the actual expense of handling freight and moving 
trains is about the only element that will vary witli the 
volume of business.^ For this reason it is better for a 
road to accept traffic at any price that will more than 
meet the cost of handling and moving it — even though 
the surplus above variable expenses is far less than 
enough to cover the full amount of the fixed outlays fairly 
chargeable to it — rather than to lose the business and 
earn nothing whatever toward meeting the fixed charges 
(§ 127). Therefore, whenever the competition between 
parallel lines becomes intense, freight rates fall to exceed- 
ingly low figures, and the struggle that ensues is not 
inappropriately described as a cut-throat contest. More- 
over, unlike a store or factory, a road that is bankrupted 

1 Even here, by loading cars to their maximum capacity, and increasing 
the size of a freight train, a larger volume of business can be handled at a 
lower average cost. ' 



852 PRINCIPLES OF ECONOMICS. 

by its losses does not go out of existence ; but it passes into 
the hands of a receiver, and continues to compete for 
business, often more recklessly than before. In the rail- 
way industry, therefore, competition is likely to entail 
severe losses, and to drive rival lines into some form of 
combination. 

In the next place, since the service which railways offer 
can be utilized only in connection with an expensive plant, 
Wastes of ^^^ construction of a parallel line involves a 
competition, needless duplication of facilities in many in- 
stances and is not desirable, even from the point of view 
of the public. It was originally supposed that railroad 
charges could be kept at a fair level by competition ; and 
that, if a company already in the field exacted excessive 
rates, relief could be secured by chartering a rival road. 
In this way millions of dollars have been wasted in build- 
ing unnecessary lines ; yet the drift toward consolidation 
has not been checked, since ultimately the rival companies 
have found it advantageous to combine. Consolidation, 
in all such cases, enables companies to reduce expenses 
and improve facilities ; and it may be considered the 
inevitable outcome of attempts to secure competition. 
Finally, it cannot be doubted that another motive for 
consolidation -has been the desire to secure monopoly 
power. A railroad, as we shall see, can never 

Monopoly. 

possess an absolute monopoly ; for, except 
over local business, its power to control rates is limited 
in various ways. But between a rate that will yield a 
fair return upon the capital actually invested, and a 
charge that will enable a company to pay the highest 



RAILROAD RATES. 353 

possible dividends, there is often a striking difference ; 
and the monopoly profits that may be derived from com- 
bination have been one cause of the movement in that 
direction. For this reason every step in the growth of 
monopoly in the transportation industry has intensified 
the public demand for governmental control over the 
railways, a problem which was never so important as it 
is to-day, and one which will require careful considera- 
tion in a subsequent part of this chapter. 

II. Railroad Rates. 

§ 222. Although, as we have seen, it was originally 
supposed that the chief work of the railway would be the 
transportation of passengers, the event has proved that 
the freight service far exceeds all the other branches. In 
1905, for instance, the railroads of the United Freight 
States earned 11,478,167,000 from freight, Service. 
$486,420,000 from passengers, and $147,609,000 from 
miscellaneous sources. From these statistics it is readily 
seen that about three quarters of the total receipts of the 
railways of America come from the transportation of 
freight. 

Even more important than the financial aspect of this 

branch of traffic is the influence which the freight service 

exerts upon the business of the country. It Freight 

is desirable, of course, that people should be ^**®^* 

able to travel where they will at reasonable rates; but 

passenger fares are of far less economic consequence than 

the rates charged for carrying commodities. Freight 

23 



354 PRINCIPLES OF ECONOMICS. 

charges are an integral part of the cost of producing all 
goods that are carried by railways, and are felt by every 
person in the community ; in fact, their universality and 
inevitableness have led many writers to the conclusion 
that they resemble taxes. Passenger rates, on the other 
hand, enter to a much smaller extent into the cost of 
conducting business enterprises, and have far less effect 
upon productive industry. 

Further still, freight rates not only affect all consum- 
ers, but go far toward determining the fortunes of pro- 
ducers. A difference of a quarter or an 

The influence ^ 

of freight eighth of a cent in the cost of transpor- 
tation may have the effect of localizing 
production in one region instead of another ; while if 
railroads are permitted to discriminate between persons, 
freight rates may destroy the business of one man and 
build up that of some other. Localities that are fortunate 
enough to enjoy access to water routes are somewhat 
less dependent on this factor, but elsewhere the person 
who adjusts freight tariffs possesses what may prove the 
power of life and death over the majority of producers. 
It is for these reasons that the question of freight rates 
has come to be regarded as the most important part of 
the railroad problem. 

§ 223. When the first railways were constructed, it 
was supposed that the charges for carrying persons or 
goods would be adjusted readily enough upon 
a uniform mileage basis, like the tolls col- 
lected for the use of turnpikes or canals ; and various 
attempts were made to enforce such simple tariffs. Here, 



RAILROAD RATES. 355 

again, original theories had to be abandoned after a brief 
trial, especially in the case of freight charges. In the 
first place, it was soon perceived that bulky products 
would not bear the same rates as goods which possessed 
o^reat value in small bulk. If a road should undertake 
to charge as much for hauling lumber or grain or stone 
as for carrying furniture or dry goods, the bulky articles 
would never be carried at all; whereas, if it should 
charge no more for the latter commodities than it must 
concede to the former, the total earnings would little 
more than cover the cost of operating trains. Obviously 
tariffs must be adjusted in some manner to the value of 
the articles carried ; and the result has been, in the 
United States, the development of elaborate systems of 
freight classification,^ by which the railways endeavor 
to adjust their charges to what the traffic will bear. 

As soon as the uniform system of tolls was abandoned, 
the adjustment of freight rates became an exceedingly 
intricate problem. In the first place, it i^g complex- 
would be impossible, even if it were desirable, ^^^^* 
to pay much consideration to the cost of transporting 
each particular commodity. Railroads transport thou- 
sands of different articles in the same freight train, or 
even the same cars ; and no one can possibly compute 
the share of the total expenses that is fairly chargeable 
to each article. It is possible to ascertain with tolerable 
accuracy the cost of making up and running a freight 
train loaded with a single commodity ; but if different 

1 See Johnson, Eailway Transportation, 113 et seq., for a description 
of the three systems of classification now in force in tlie United States. 



356 PRINCIPLES OF ECONOMICS. 

articles are carried, it is not practicable to determine 

what precise part of the total cost should be attributed 

to each. 

The situation is rendered the more peculiar by the fact 

that so large a part of the total expenses of a railroad is 

fixed and does not vary with the volume of 
Different 

of traffic that is secured. The cost of operating 



trains is the element of expense which comes 
the nearest to varying in proportion to the amount of 
freight carried ; and even here the correspondence is not 
exact, since a considerable amount of additional business 
can be accommodated by filling cars to the limit of their 
capacity or by increasing the size of the freight train, 
without a proportionate increase of expense. It follows 
from this circumstance that it is profitable for a road to 
carry cheap and bulky products for anything more than 
the actual cost of handling the goods and moving the 
cars, even though the charge does not cover all of the 
fixed expenses, theoretically but not practically, attribu- 
table to every commodity transported. If something can 
be secured from low-grade traffic toward meeting a part 
of the fixed expenses, even though it be less than the full 
amount fairly chargeable, just so much less will need to 
be obtained from commodities of a higher grade. Such an 
adjustment of rates constitutes a discrimination against 
the latter class of goods ; but, if the road could not se- 
cure anything from low-grade traffic, it would be neces- 
sary to obtain still more from traffic of a higher grade. 
For this reason, neither the producer nor the consumer 
of the latter is injured by the concession made to the 



RAILROAD RATES. 357 

former; on the contrary, by reducing rates to a point 
that will enable bulky goods to be transported consider- 
able distances, the services of the railway to the com- 
munity are increased and all classes of persons are 
benefited. 

Not only is it impossible for a road to charge a uni- 
form rate for all classes of freight, but it has not proved 
practicable to adjust the rate for any single j^^^^ ^s. 
commodity on a uniform mileage basis. At criminations, 
various points along the line of any railroad, or at its 
terminals, competition is likely to be encountered from 
other railways or from water routes. Unless its rivals 
are restrained from offering low rates between competi- 
tive points, the road must either reduce its charges at 
such places or lose all its competitive traffic. And if, as 
it would naturally do, it makes the necessary conces- 
sions at these points, competitive traffic will be carried 
at lower rates than similar business passing between way 
stations served by no other line. Thus it comes about that 
freight will be carried from one end of a line to the other 
at even a lower rate than is charged for traffic which is car- 
ried to some intermediate point, and in this way many local 
discriminations arise. Shippers at the way stations who 
pay the higher charges not unnaturally look upon such a 
condition of affairs as a grievous hardship ; but, if the dis- 
criminations in favor of the competitive points are no 
larger than the rivalry of other roads makes necessary, 
they are both justifiable and inevitable. Through lines, at 
whose terminals competition must be encountered, could 
not be built if they were allowed to charge no more for 



358 PRINCIPLES OF ECONOMiqS. 

local traffic than for competitive. If local rates should 
be reduced to the level of those granted to competitive 
points, the road could not make any money ; while if the 
rates for competitive traffic were raised to the level of 
those charged for local, none of this business would be 
secured. As a matter of fact, if something can be se- 
cured from competitive business, the road can afford to 
carry local traffic for somewhat lower rates than would 
have to be charged otherwise; local charges, therefore, 
are not higher, but may be lower, on account of the fact 
that competitive traffic is handled at reduced prices. It 
is true that the discriminations in favor of junction or 
terminal points tell against the business of the way sta- 
tions ; but the railroad merely accepts existing inequali- 
ties of situation, and does not create them. A town 
enjoying access to water routes had cheaper transporta- 
tion before the road was built ; and will continue to have 
it afterward, even if the new carrier refrains from bid- 
ding for competitive traffic. So, too, the construction of 
more than one line between two points creates an in- 
equality of situation, for which neither road may be re- 
sponsible, and to which freight rates must be adjusted. 

Besides the competition of rival routes, the competi- 
tion of markets affects railway charges in a striking 
Competition manner. Products of any kind that are 
of markets, carried to the same market from different 
places of production must sell for about the same price. 
Since the producer can obtain for his goods no more 
than the market allows, the railway cannot charge him 
very much more than is exacted by roads that serve pro- 



RAILROAD RATES. 359 

ducers in other sections of country without destroying 
his business and losing his traffic. If Georgia peaches 
are to be sold in Philadelphia and New York, or Ala- 
bama iron is to be marketed in Pennsylvania, the goods 
brought from the South must be carried at lower mileage 
rates than those procured from nearer sources of supply. 
Even if there is only a single road or railway system in 
each section of the country, competition for markets 
will still continue ; and it is for this reason that a road 
can never have more than a partial monopoly. 

Oftentimes, however, charging what the traffic will 
bear has passed into charging what it will not bear, and 
railway managers have adjusted rates in an xjnjustdis- 
arbitrary and unjust manner. They have criminations, 
discriminated in favor of places in which they or their 
associates were personally interested, and in favor of 
business enterprises in which they had a personal stake. 
Worst of all have been personal discriminations between 
shippers who were, upon the principles above stated, en- 
titled to equal or substantially equal treatment. The 
Standard Oil Monopoly was, in its earlier days, built up 
almost wholly by outrageous discriminations in its favor ; 
and to-day, it is very doubtful whether a competing 
company will not be ruined if in any way the railroads 
can compass its undoing. The monopoly of dressed 
beef was established in a similar manner, unfair treat- 
ment of independent miners threw the anthracite coal 
fields into the hands of a few railroads, and in many 
other cases monopolies have been built up by means of 
rebates and unjust discriminations between shippers. 



360 PRINCIPLES OF ECONOMICS. 

Specious arguments have been advanced in defense of 
the favors accorded to large producers ; among other 
things, it is argued that it costs a railway less to handle 
freight when it is supplied by the train load than when 
it must be gathered up in small consignments. But the 
cost of service is rejected by railway managers them- 
selves as the basis for adjusting freight rates, and it 
cannot be appealed to in support of practices that foster 
monopoly. Charges cannot be adjusted upon a basis 
of absolute uniformity, such as is attained by a system 
of tolls ; but it is possible and highly desirable to elimi- 
nate absolutely all personal discriminations. That it 
costs less to handle a train load than a car load should 
not weigh for an instant against the desirability of al- 
lowing all producers to use the national highways upon 
equal terms. This is a case in which discrimination is 
as inadmissible as it would be in the adjustment of pos- 
tal rates, even though the latter item is a much smaller 
factor in the cost of production than the charge for 
transporting freight. 

We cannot consider further the intricate problems 

connected with the adjustment of railway rates. It has 

been shown that a uniform system of tolls is 

Summary. 

impossible and undesirable, and that basing 

rates upon the cost of each particular service is unde- 
sirable and impossible. Freight charges must be ad- 
justed to what the traffic will bear; it is necessary to 
discriminate in favor of bulky products and competitive 
business ; and producers cannot be made to pay more 
than the competition of markets will permit. Against 



PUBLIC CONTROL OF RAILROADS. 361 

these hard facts, restrictive or regulative legislation will 
beat in vain ; and a rational policy toward the railway 
must proceed in a full recognition of the conditions of 
the rate problem. 

III. Public Control of Railroads. 

§ 224. Prior to 1870 the chief problem connected 
with railways in the United States was that of securing 
the construction of the roads needed to ^ , 

Early policy 

handle the existing volume of traffic and to toward rau- 
provide for the future development of the 
country. So necessary was it for every community or 
section to obtain railroad facilities that our various gov- 
ernments, local, state, and national, aided construction 
by grants of land or money ; while everywhere the dispo- 
sition of the people was most friendly to railway enter- 
prises. The charters of some of the earlier roads and 
occasional statutes placed certain restrictions upon prof- 
its, or attempted to prescribe systems of tolls for goods 
and passengers such as had been arranged for turnpikes 
or canal companies. In New England, moreover, some 
states established railroad commissions with limited 
powers of supervision and control. But, in general, 
little serious effort had been made to regulate or control 
the railroads of the country ; and it seems to have been 
assumed that competition would oblige the companies to 
provide good service at reasonable prices. 

But a very few years after the Civil War the attitude 
of our people toward the railways began to change, and 



362 PRINCIPLES OF ECONOMICS. 

about 1870 a great deal of dissatisfaction arose in the 

northern part of the Mississippi Valley. After con- 

lo ment ^^^^^^^le agitation of the subject, laws, called 

of a railway Granger laws, were enacted^ in Illinois, 

Iowa, Minnesota, and Wisconsin, and then 

in other states, which were intended to correct various 

abuses that were believed to exist. That the farmer had 

real grievances cannot be doubted ; not only were rates 

frequently extortionate in themselves, but, still worse, 

unjustifiable local and personal discriminations greatly 

aggravated the situation. Some of the new statutes, 

however, were unwise and even unjust to the railroads ; 

and it was found necessary to repeal them or to amend 

materially their provisions. 

The managers of the railways, when the hostile legis- 
lation was enacted, went into the courts and endeavored 
ThepubUc to have it declared unconstitutional. They 
character of asserted that their roads were private en- 

tne railroad ^ 

business. terprises and that a legislature could no 
more regulate the prices charged or service offered than 
it could control the details of any other business. This 
position was contrary to the well-established principles 
of the common law, by which common carriers were sub- 
ject to public regulation in so far as it might be needed 
to insure the general welfare. And it appears little short 
of humorous when one considers that the very companies 
that now claimed to be purely private enterprises had 
originally asked and received the power to condemn, 

1 These are known as the Granger laws, since they were enacted in 
response to the demand of the Grange, an association that was then wide- 
spread in these states. See Hadley, Railway Transportation, 133-136. 






PUBLIC CONTROL OF RAILROADS. 363 



under right of eminent domain, the land needed for the 
construction of their lines, upon the theory that they 
were undertaking work of great public utility and im- 
portance. In 1877 the Supreme Court decided, once for 
all, that a railway performs a service that is of public 
interest ; and that, although the company remains a 
private corporation, it is subject to legislative regulation. 
By subsequent decisions the court has reserved to itself 
the power of deciding what acts of a legislature are to be 
deemed a reasonable and necessary exercise of the su- 
pervisory power which it is declared to possess, but since 
that time the public character of railway transportation 
has not been open to further debate. 

§ 225. The most tangible outcome of the Granger 
movement was the establishment of various railway com- 
missions in the West and South with power to s^^te railroad 
regulate charges and otherwise control the commissions, 
transportation industry. Meanwhile, in the East, another 
type of commission had been developed, which possessed 
no power to issue orders to the railways, but was author- 
ized to collect information and make recommendations to 
the legislature. Although appearing to possess greater 
authority, most of the so-called mandatory commissions 
actually accomplished less than the advisory commission 
of Massachusetts. In that state the high character of the 
commission itself, the fact that the railroads were older 
and more stable, and the influence of an alert public 
opinion, resulted in the enactment of beneficial laws or 
the acceptance by the roads of many of the recommenda- 
tions that were made. Under different conditions, how- 



864 PRINCIPLES OF ECONOMICS. 

ever, the Massachusetts plan would not have produced a 

satisfactory result ; and the tendency in recent years has 

been toward giving the state commissions mandatory 

as well as advisory powers. At the present time some 

thirty-two of the states have established commissions 

that exercise more or less control over railroads. 

The control which the states attempted to exercise 

by statute or through commissions extended for some 

years to all railroad traffic, interstate as well 
The Inter- -^ ' 

state Com- as intrastate ; but in 1886 the Supreme Court 
decided that a state could regulate only the 
latter, the former being declared to be subject exclusively 
to national control. This decision took away from the 
state commissions a considerable part of their power, 
and intensified greatly the desire for federal regulation 
of the railways. Accordingly, in 1887, Congress enacted 
the Interstate Commerce Law, upon which most later 
discussions of railroad control have turned. 

The act of 1887 applied only to interstate traffic, but 
contained a number of far-reaching provisions. It pro- 
its provi- hibited extortionate charges and also all un- 
sions. reasonable discriminations between persons, 

localities, or different classes of traffic. Then, more spe- 
cifically, it prescribed that no common carrier subject to 
the act should charge more for transporting passengers or 
goods a shorter distance tlian it received for a longer, the 
conditions being substantially the same and the shorter 
distance being included in the longer. ^ It also prohibited 

1 This had the effect, not of proliibiting local discriminations, but of 
limiting them to such a degree that the competitive point could not 



PUBLIC CONTROL OF RAILROADS. 365 

the pooling of freight traffic or of aggregate money 
earnings by railways, with the purpose of obliging the 
roads to compete with one another; in fact, the prin- 
ciple that competition can and should control the in- 
dustry of transportation was that upon which the entire 
law was based. Other provisions of the act required 
publicity of rates and some other things which cannot be 
considered here. Finally an interstate commerce com- 
mission was appointed to enforce the law, and given 
powers that were supposed to be ample for that purpose. 
This body was to receive complaints from shippers or 
others, investigate them, and adjudicate the cases as they 
might arise; but the railroads, of course, could appeal 
from the decisions of the commission to the courts of law. 
The intention of Congress was that all questions of fact 
should be studied and decided by the commission, and 
that any legal problems that might be involved should 
be settled by the courts. 

§ 226. The actual results of the Interstate Commerce 
Law fell far short of the expectations of its framers, 
largely on account of legal difficulties which 

. . . ^ Results of 

the commission encountered in its efforts federal regu- 
to enforce the act. When the commission * °"* 
appealed to the courts to enforce its orders, or railroads 
instituted suits in order to obtain a modification of them, 
the courts did not accept as final the facts ascertained by 

actually receive a lower rate than the station not favored by compe- 
tition. Of course a local discrimination not great enough to make the 
charge for a long haul less than that for a short haul might be condemned 
by the commission as unreasonable under the previous provisions of the 
act. 



366 PRINCIPLES OF ECONOMICS. 

the commission; but reheard the cases in all details, 
even allowing the carriers to introduce new evidence 
not submitted at the original hearing. The effect of 
tliis was, on the one hand, to encourage the roads not to 
make a full disclosure of their cases before the commis- 
sion, whereby its authority and efficiency were impaired. 
And, on the other hand, the necessity of rehearing each 
case in all its details, first in the lower courts, then in the 
higher if an appeal was taken, led to much protracted 
litigation which resulted in what was, to all intents and 
purposes, a denial of relief to shippers. 

Furthermore, the Supreme Court limited very nar- 
rowly the powers of the commission. For a number of 

years after the enactment of the law, the 
The powers 
of the com- commission, when it found that existing 

mission. ■, ^ ^ -\ i^ a • 

charges were unreasonable, imdertook in 
many cases to determine what rates would be reason- 
able. But the Court at last decided that the law of 
1887 conferred no such authority upon the commission, 
and intrusted it with nothing more than the power of 
deciding whether past rates had been reasonable or not. 
Since the only adequate remedy for an unjust rate is the 
estabhshment of a just one,^ this decision stripped the 
commission of all real control over railway charges. 
The fate of the long and short-haul clause of the act 

1 Conceivably, when the commission has decided a rate to be unjust, 
the shipper might bring suit for damages and recover the amount un- 
justly taken from him. Practically, the damage is hard to compute, 
since it may amount to the utter ruin of one's business ; while the aver- 
age shipper cannot, as experience shows, make use of this uncertain and 
expensive remedy. 



PUBLIC CONTROL OF RAILROADS. 367 

of 1887 is equally interesting. The law did not prohibit 
charging more for a short haul than a long haul in cases 
where the conditions were dissimilar; and Long and 
the commission soon decided that compe- short hanis. 
tition of water routes or railroads not subject to its 
authority might be sufficient to make the conditions so 
unlike as to justify a lower charge for a long haul. 
The Supreme Court, however, in the test case, held that 
competition of other roads subject to the act was enough 
to modify the situation and justify a lower rate for a 
longer distance. The result is that in all cases where 
any sort of competition prevails, railroads may adjust 
their charges as they please, so that the long and short- 
haul clause is practically of no effect. 

But although in many important matters the Inter- 
state Commerce Law proved a disappointment, the act 
produced a number of excellent results. 
Greater publicity of railroad rates was se- 
cured, useful statistics were collected, the relations of 
the railroads to one another were improved in various 
ways, while the investigations and recommendations of 
the commission tended to secure a better adjustment 
of railway charges. Then, too, the entire experiment 
had considerable educational value ; and we can now 
see, more clearly than in 1887, a way out of some of the 
problems presented by federal railway regulation. 

In 1893 an amendment to the Interstate Commerce Act 
gave the commission greater power in securing evidence 
bearing upon disputed cases, in 1901 another required 
railroad companies to return monthly reports of all acci- 



368 PRINCIPLES OF ECONOMICS. 

dents, and in 1903 the so-called Elkins Act made it a 

misdemeanor for a shipper to receive a rebate as well 

as for a carrier to offer one.^ But none of 
Amendments 

to the act these measures went to the root of the diffi- 
culty, and the subject continued to be agi- 
tated until, after a protracted contest, Congress enacted 
the law of June 29, 1906, which radically amended the 
Interstate Commerce Act in various directions. 

In the first place, the new law brings express com- 
panies, sleeping-car companies, private-car lines, and 
The act of P^P^ lines under the control of the Interstate 
1906. Commerce Commission ; and may thus en- 

able that body to remedy a host of evils, particularly 
extortionate or discriminating charges, which hitherto 
have been practically beyond its reach. Then it pro- 
hibits the granting of free passes and the granting or 
receiving rebates or discriminating rates of any kind 
whatever. It is now a misdemeanor for any person or 
corporation " to offer, grant, or give, or to solicit, ac- 
cept, or receive, any rebate, concession, or discrimina- 
tion " in the transportation of any property in interstate 
or foreign commerce ; and the penalty for the infraction 
of the law may be imprisonment as well as a fine, at the 
discretion of the court. Most essential of all, however, 
is the fourth provision, that the Interstate Commerce 
Commission shall hereafter have the power, after a full 
hearing upon complaints brought in due form, " to de- 
termine and prescribe " what is a " just and reasonable 

1 This act, very unwisely, repealed that clause of the act of 1887 
which made imprisonment, as well as fine, the penalty for granting 
rebates. 



PUBLIC CONTROL OF RAILROADS. 369 

rate " for a carrier to charge. Rates thus established by 
the commission are to take effect after a reasonable 
time, not less than thirty days, and to remain in force 
as the maximum legal rates for such a period, not ex- 
ceeding two years, as the commission may direct, unless 
in the meantime they are suspended by the commission 
or by a court of competent jurisdiction. And, finally, 
the commission is given enlarged powers to secure uni- 
form and honest accounting, while renewed effort is 
made to enforce greater publicity and stability of rates. 

Precisely how much the law of 1906 will accomplish 
cannot be determined until many of its provisions are 
adjudicated in the courts; and much will value of the 
depend, in any case, upon the ability and actofi906. 
courage displayed by the Interstate Commerce Commis- 
sion in the exercise of its new and enlarged powers. 
But it is clear that in aiming at greater publicity, 
strengthening the prohibition of rebates, and giving the 
commission power to fix and determine reasonable rates. 
Congress moved in the right direction; and it will be 
exceedingly unfortunate if legal difficulties again deprive 
the law of most of its force. The act of 1906 has been 
violently assailed in some quarters as a radical and dan- 
gerous law which will surely lead to government owner- 
ship of railroads ; but in point of fact it is a highly 
conservative measure which offers about the only dis- 
cernible chance of avoiding such a consummation. The 
day of unregulated natural monopolies has gone forever, 
and we have no alternatives except effective public con- 
trol or public ownership. 

24 



870 PRINCIPLES OF ECONOMICS. 

Disappointment has been expressed because the law 

as amended does not permit pooling, under the control 

and supervision of the commission. In be- 
Pooling. 

half of such action it was urged that the act 

of 1887 merely forced railways to consolidate, and that 
it would be better to recognize frankly the monopolistic 
character of the railroad industry, and permit pooling 
under public control. Much can be said in favor of 
such an experiment,^ but it is doubtful whether Con- 
gress can be induced to adopt such a policy in any near 
future. In any case the first step is to secure effective 
control of railway rates ; and until this is done, it may 
be unwise to legalize the device of pooling. 

§ 227. Federal control of private corporations en- 
gaged in interstate transportation has presented, and 
National still offers, SO many difficulties that national 
ownership, ownership and operation of railroads have 
been proposed. It is argued that the country has already 
been parceled out among a few large systems, so that 
the work of organizing the business upon a national 
scale has already been largely accomplished ; and it is 
believed that public ownership offers in this field all the 
advantages that are claimed for it in the case of munici- 
pal industries. On the other hand, purchase of the rail- 

1 The usual arguments in favor of pooling are that it makes rates 
more stable, so that business men know what to count upon, and that it 
removes the temptation to grant personal discriminations. Such dis- 
criminations have arisen from the desire of competing roads to get busi- 
ness, and it is argued that pooling removes this pressure. In reply to 
the objection that pooling creates a monopoly, it is said that the through 
traffic, to which pooling arrangements apply, is subject to competition of 
markets or of water routes. 



PUBLIC CONTROL OF RAILROADS. 371 

ways of the country would involve serious risks, since 
it would require an investment of 112,000,000,000 or 
115,000,000,000, while the pressure of the employees 
for high wages and of the public for low charges might 
make the financial results very uncertain. Then, too, it 
would add more than a million men to the existing body 
of federal employees ; and, even if civil service regula- 
tions should be enforced, there would exist here a for- 
midable army of voters for whose support the politicians 
would bid, as they appeal now to the holders of military 
pensions. Finally, enormous difficulties would probably 
arise in the adjustment of rates and the extension or 
improvement of facilities. In the matter of rates, 
each section of country has interests that conflict with 
those of other sections, while similar conditions arise 
between industry and industry ; and in asking for new 
and improved facilities, the same political jobbery would 
appear that to-day attends congressional appropriations 
for rivers and harbors or the extension of rural free de- 
livery routes. Tlien, too, it is not probable that the rail- 
way service would continue to be as efficient as it is at 
present, or that [the adjustment of rates would be elastic 
enough to meet the needs of business. Public owner- 
ship of municipal industries presents many difficulties, 
but it offers a simple problem when compared with the 
federal ownership of railways. In time, some of the 
objections which we have mentioned may come to pos- 
sess less weight, and the matter may assume a different 
aspect ; but, for the present, the difficulties attending the 
nationalization of railroads are so great as to leave us 



372 PRINCIPLES OF ECONOMICS. 

no alternative but the development of effective inechods 
of federal control of this important industry. 



LITERATURE ON CHAPTER XII. 

General: Hadley, Economics, 153-158, 171-179, 398-400; 
Seager, Introduction to Economics, 460-475; Daniels, Public 
Finance, 224-264. 

Special: Hadley, Railroad Transportation; Hendrick, Rail- 
way Control by Commission; Johnson, American Railway Trans- 
portation ; B. H. Meyer, Railway Legislation in the United States; 
H. R. Meyer, Government Regulation of Railway Rates ; Report 
of the Industrial Commission, Vol. XIX. 259-484 ; The American 
Railway. 



FOREIGN TRADE OF THE UNITED STATES. 373 



CHAPTER XIII. 



INTERNATIONAL TRADE. 

I. The Foreign Trade of the United States. 

§ 228. The foreign commerce of this country is 
smaller than the domestic, although it usually receives 
far greater attention. Yet our commerce Magnitude of 

with foreign countries is surpassed only by the foreign 

commerce of 

the foreign trade of England, France, and the united 
Germany. The following table shows the ^^ ^^* 
exports and imports of merchandise of the United States 
for fiscal years ending June 30 : — 



Tear. 


Exports. 


Imports. 


Total. 


1880 
1885 
1890 
1895 
1900 
1906 


$835,638,000 

742,189,000 

857,828,000 

807,538,000 

1,394,483,000 

1,743,864,000 


$667,954,000 
577,527,000 
789,310,000 
731,969,000 
849,941,000 

1,226,562,000 


$1,503,593,000 
1,319,717,000 
1,647,139,000 
1,539,508,000 
2,244,424,000 
2,970,426,000 



§ 229. The principal exports from the United States 

have always been agricultural products. In 1905 

these formed fifty-five per cent of the _ 

-' ^ Character of 

total, while manufactured goods made up the export 
thirty-six per cent. The exports of manu- 
factured products show a gradual increase from year 



374 



PRINCIPLES OF ECONOMICS. 



to year. The most important articles exported in 1905 
were as follows : — 



Commodity. 


Value. 


Commodity. 


Value. 


Cotton 

Provisions .... 

Iron and Steel and 
Manufactures . . 

Bread stuffs . . . 

Copper and Manu- 
factures . . . . 

Mineral Oils . . . 

Wood and Manufac- 
tures 


$379,965,000 
169,998,000 

1 134,728,000 

107,732,000 

[ 86,225,000 

79,793,000 

1 58,002,000 


Cotton Manufac- 
tures 

Live Animals . . 

Leather and Manu- 
factures .... 

Tobacco and Manu- 
factures .... 

Coal and Coke . . 

Agricultural Imple- 
ments .... 


[$49,666,000 

46,728,000 

\ 37,9.36,000 

1 35,491,000 

31,386,000 

1 20,721,000 



Of the commodities imported into the United States in 
1905 forty-eight per cent came from Europe. 



Character of 
our import 

trade. The principal imports were : — 



Commodity. 


Value. 


Commodity. 


Value. 


Sugar . . . , . 

Coffee 

Vegetable Fibres 

and Manufactures 
Chemicals, Drugs, 

and Dyes . . . 
Hides and Skins 
Raw Silk .... 
India Rubber . . 


$97,645,000 
84,654,000 

1 78,243,000 

\ 64,779,000 

64,764,000 
61,040,000 
49,878,000 


Cotton Manufac- 
tures 

Wool 

Jewelry and pre- 
cious Stones . . 

Silk Manufactures . 

Fruits and Nuts . . 

Copper and Manu- 
factures .... 

Iron and Steel . . 


1 $48,919,000 

46,225,000 

1 35,065,000 

32,614,000 
25,937,000 

\ 24,835,000 

23,510,000 



Our imports consist mainly of food products and 
raw materials which we are unable to raise at all, or 
unable to raise in sufficient quantity. The imports 
of wholly or partially manufactured goods amount to 
less than 1200,000,000. This is only a small fraction 
of the product of domestic manufactures. 



INTERNATIONAL COMMERCE. 375 

11. The Nature of International Commerce. 
§ 230. Merchants sell commodities in foreign coun- 
tries, or import goods from abroad, whenever differences 
between domestic and foreign prices make international 
it profitable to do so. The exporter or the ^/^ exchange 
importer sells goods for money, or buvs of commodities 

" for money. 

foreign merchandise with money. From 

this point of view, international trade consists in the 

exchange of commodities for money , 

The transportation of money from one country to 
another entails considerable expense, so that an elabo- 
rate mechanism of credit has been developed Themechanism 
to enable international trade to be carried tionai pay- 
on with as little money as possible. Drafts ^^^^^' 
and bills of exchange serve to pay most international 
debts, so that money is used merely to pay balances 
(§164). When the exports of a country exceed the 
impoi'ts, then foreign debtors cannot secure enough 
bills of exchange to pay for their purchases, and money 
may be sent to settle the balance of indebtedness. An 
excess of exports over imports is said to create a " favor- 
able balance of trade." When imports exceed exports, 
money may be sent abroad to pay for the excess, and 
the balance of trade is said to be " unfavorable„" 

The exports from a country pay for the great bulk of 
the commodities imported. The statistics of Exports pay. 
the foreign commerce of the United States fo^i^^P^rts. 
show that the exports and imports of gold are exceed- 
ingly small when they are compared with the exports 
and imports of commodities : — 



376 



PRINCIPLES OF ECONOMICS. 



Year. 


Total Exports and Imports 
of Commodities. 


Total Exports and Imports 
of Gold. 


1901 
1902 
1903 
1904 
1905 


$2,310,000,000 
2,285,000,000 
2,445,000,000 
2,451,000,000 
2,636,000,000 


$119,236,000 

100,590,000 

92,072,000 

180,515,000 

146,242,000 



§ 231. The foreign exchanges of any country include 

many other international transactions besides the pur- 

The foreign chase or sale of merchandise. The follow- 

exchanges. jjjg transactions give rise to international 

indebtedness : ^ — 

1. Investment of capital in foreign countries. This 
gives rise at first to a debt owed by the country whose 
citizens make the investment. Then it causes an an- 
nual debt owed to foreign capitalists by citizens of 
the country where the capital is invested. At least 
12,000,000,000 of foreign capital is invested in the 
United States, and tliis amount is increased in pros- 
perous years. Thus the United States owes about 
$90,000,000 annually for interest on foreign capital. 

2. English ships do a large part of the ocean carry- 
ing trade of the world, and receive payments for freight- 
agCv Of the foreign trade of the United States only 
about twelve per cent has been carried in American 
vessels in recent years, so that we have owed a balance 
of freight charges to foreigners. The inward freight 



1 For a full account of such transactions, see Goschen, " The Foreign 
Exchanges." Space permits merely a mention of the most important 
here. 



INTERNATIONAL COMMERCE. 377 

charges paid to foreign ship owners may amount to 
about 160,000,000 annually. 

3. Citizens who travel in foreign countries incur in- 
debtedness there. Americans spend about $100,000,000 
in foreign travel each year. This figure greatly exceeds 
the expenditures made by foreign travelers in this coun- 
try ; so that we owe abroad many million dollars annu- 
ally for the excess. 

4. London serves as a world's clearing house for the 
settlement of international debts. The charges made 
for such services create debts owed by all nations to 
London bankers. 

As a result of all such international obligations, Eng- 
land is the creditor of many nations each year for 
freight charges earned by English ships, for comparative 

interest on several billion dollars of capital positions of 

England and 
invested in various countries, and for com- tiie united 

missions,, etc., of London bankers. As a *^*^^* 
result, she is able to import merchandise that vastly 
exceeds her exports, and does not have to pay for the 
" unfavorable balance of trade " by shipping gold to 
other countries. The United States, however, owes 
very large amounts annually to foreign creditors for the 
various items enumerated. Consequently our exports 
of merchandise may exceed our imports largely without 
making it necessary for foreign buyers to ship gold to 
this country. In prosperous years, however, it is prob- 
able that foreigners constantly invest capital here ; so 
that the volume of our indebtedness is decreased. 
In a large number of cases international payments 



378 PRINCIPLES OF ECONOMICS, 

for all forms of indebtedness are made indirectly 
Indirect through London. Tea imported from China, 
interStionai ^^ ^^^^^ imported from France, into the 
debts. United States may be paid for by bills of 

exchange drawn by American creditors against exports 

of wheat or cotton sold to English merchants. 
§ 232. Money is shipped from one country to another 

when needed to settle a balance of indebtedness for 

imports of merchandise, for freiiJ:ht charges, 
International ^ / ° ° ' 

movements for interest on foreign investments, for trav- 
money. gigj^g' expenses, etc. Many errors are made 
by comparing the exports and imports of money with 
exports and imports of merchandise. Money is needed 
merely to settle net balances of indebtedness of all sorts. 
The United States has had a considerable surplus of 
exports of merchandise (a " favorable balance of 
trade ") every year since 1876 with only three excep- 
tions. Yet our imports of gold and silver have 
exceeded exports in only five years during this period. 
The explanation is that our other foreign" debts plus 
the debt owed for imports, exceeded usually our exports 
of merchandise and the other debts owed us by for- 
eigners. On the other hand. Great Britain has each 
year an enormous excess of imports over exports of 
merchandise, but this " unfavorable balance of trade " 
is not paid by exports of money. It comes as payment 
for other debts owed by citizens of foreign countries. 

Eliminating all disturbances originating in the money 
supply, and supposing that a country has a sound cur- 
rency, then imports or exports of money will be regu- 



INTERNATIONAL COMMERCE. 379 

fated automatically. Suppose money to flow into the 
United States in settlement of a net in- . . 

Automatic 
debtedness of foreigners. Continued im- limits to 

, J, .„ . . , , exports and 

ports ot money will raise prices here, and imports of 

tend to lower them in the countries whence ^^^^^' 
the money comes. The rise of prices will make this a 
good market to sell in and a bad market to buy in. 
Thus imports w^ill increase and exports decrease, until 
our increasing imports create a debt to foreigners that 
will balance the debts that caused shipments of money. 
When imports of merchandise increase to this extent, 
the inflow of money will cease. Conversely, if money 
continually leaves the country, prices tend to fall ; 
exports increase and imports decrease. A growing 
excess of exports of merchandise will finally turn the 
balance of indebtedness the other way, and check 
exports of money. A nation that produces as much 
gold and silver as the United States may export some 
gold and silver continually, without lowering prices 
materially. 

The international movements of money are affected 
by the action of international banking houses. When- 
ever the rate of interest on call loans or ^ ,, 

The action 

short-time paper is very low in London, for of banking 
instance, these banking houses are likely to 
ship part of their reserve of money to New York, or 
Berlin, or Paris, in order to take advantage of higher 
rates of interest in those cities. 

For a long time it was thought that foreign trade 
was beneficial when it led to an excess of exports over 



380 PRINCIPLES OF ECONOMICS. 

imports, and hence to imports of the precious metals. 
This idea has been abandoned by economists since it 

has been seen that a continued importa- 
The advantages 

of interna- tion of money merely tends to raise prices 
tionai trade. ^^^ ^^ check itself. A country cannot sell 
to other countries unless it also buys. This year it 
may be possible to check imports and to stimulate 
exports. But next year or the following year continued 
importations of gold will raise prices, make it more 
difficult to sell in foreign countries, and make it easier 
for foreigners to sell commodities here. The real 
advantages of foreign commerce are : — 

1. It enables a country to procure commodities that 
cannot be produced at home. 

2. It enables a country to produce those products for 
which it has the greatest advantages, and to exchange 
them for products which cannot be produced as cheaply. 

III. International Values. 

§ 233. International trade is profoundly influenced by 

the fact that capital and labor do not move from one 

country to another as readily as between 
Imperfect mo- 
bility of labor different localities in the same country. 

Distance, language, religion, political insti- 
tutions, and customs all tend to hinder international 
movements of labor and capital. Undoubtedly some 
of these causes impede the movement of labor and 
capital within such a vast country as the United States. 
In so far as this is true, trade between the Atlantic and 
Pacific coasts, for instance, resembles international trade 



INTERNATIONAL VALUES. 381 

in this particular. Modern conditions favor the move- 
ment of labor and capital between different countries, 
yet this immobility still exists. 

Within any area where labor and capital are practi- 
cally free to move where they desire, all commodities 
will be produced in those places where the Result of this 
absolute advantages for producing them are "^o^^iityof 

» ^ o labor and 

greatest. The localities that offer the great- capital. 
est advantages will become the exclusive seats of pro- 
duction of each commodity. These advantages include 
all elements that tend to make the social cost of pro- 
duction low, and include the important element of 
accessibility to the market. The products of such an 
area will tend to have a value proportioned to the mar- 
ginal expense of producing them. On the other hand, 
between two countries, all labor and capital will not flow 
to the places in either country where the absolute advan- 
tages for production are greatest. Each country will 
invest its labor and capital so as to make the best of the 
advantages which it has. Only the surplus labor and 
capital of older nations seek investment in other coun- 
tries where the natural opportunities for investment are 
not so fully utilized and developed. It follows that a 
bushel of wheat may be produced in one country with 
twice the expenditure of labor and capital required to 
produce a yard of cotton cloth ; while, in a second coun- 
try, the two commodities may be produced at exactly 
the same social cost. This would be impossible if 
labor and capital moved freely from one country to 
another. 



382 



PRINCIPLES OF ECONOMICS. 



§ 234. Money tends to move to countries where its 

general purchasing power is greatest, and so to reduce 

International *^^^ general purchasing power of an ounce 

movements of of gold to the same level in all places 

money tend 

to equalize (§§ 173-176). But this docs not mean that 
general prices. ^^^ power of money to buy wheat or cloth 
or steel is the same in all countries. Within each coun- 
try the prices of individual commodities will be propor- 
tional to the marginal expense of producing them. This 
may give different relative prices for individual com- 
modities in every country. 

§ 235. The manner in which relative prices vary in 

Differences of different countries may be illustrated by the 

relative prices, following table of assumed prices for various 

commodities in two countries, say England and the 

United States : — • 



Commodities. 


Prices in 
England. 


Prices in 
United States. 


One ton steel rails . . 


$14.00 


$20.00 


One pound wool . . . 


.15 


.20 


One yard carpet . . . 


1.20 


2.00 


One yard cotton cloth 


.12 


.15 


One bushel wheat . . 


.90 


.60 


One bushel corn . . 


.70 


.50 


One pound leather . . 


.20 


.15 


One pound pork . . 


.15 


.07 



We assume the first four commodities to have a 
smaller money cost in England, and the last four to 
be cheaper in the United States. But the power of a 
dollar to command the entire group of commodities in 
the quantity usually consumed, might be about the same 



INTERNATIONAL VALUES. 383 

in both countries. Finally, this table of prices would 
tell us nothing concerning the absolute social costs of 
producing any one of these commodities in the two 
countries. Less units of labor and capital might be 
required to produce a ton of steel rails in the United 
States than in England. But if the money cost of 
labor and capital is much less in England, the money 
price of steel rails might be less in that country. Labor 
and capital do not flow from one to the other freely 
enough to insure to each unit of the two factors of pro- 
duction the same money returns in both countries. 

§ 236. Now, an American exporter of wheat will send 
wheat to England whenever the difference in the prices 
of wheat is sufficient to pay the cost of . ^ j. 
transportation and leave a profit on the trade Msed 
transaction. Similarly, American importers ences in reia- 
will examine the English prices of steel ^^^p^^^^s- 
rails, carpets, and cotton cloth ; and will import them 
if they can pay transportation charges and yet make a 
profit by selling at American prices. Now, it might 
seem that, under the circumstances assumed, England 
would supply the United States with all the rails, wool, 
carpets, and cotton cloth consumed here ; and that the 
United States would furnish England with all her supply 
of wheat, corn, leather, and pork. But this would not 
be the case. 

Suppose England to begin to export to the United 
States the four commodities of which the English prices 
are lower, and the United States to export to^ England 
the four commodities of which the American priees 



384 



PRINCIPLES OF ECONOMICS. 



are lower. Such a trade could continue until one 

country had an excess of exports and the other had 

Actual course an excess of imports. Exports and imports 

of trade te- would not balance each other permanently, 
tween the r ./ 

two countries. Suppose the United States sends to England 
money to pay for an excess of imports. As this expor- 
tation of money continues, prices begin to rise in Eng- 
land and to fall in the United States. Suppose the 
change of prices to be twenty per cent. Then we should 
have an altered scale of prices as follows: — 



Commodities. 


English prices. 


American prices. 


Steel rails . . 


116.80 


$16.00 


Wool . . . 


.18 


.16 


Carpets . . . 


1.44 


1.60 


Cotton cloth . 


.144 


.12 


Wheat . . . 


1.08 


.48 


Corn .... 


.84 


.40 


Leather . . 


.24 


.12 


Pork . . . 


.18 


.056 



Evidently the changed prices have made it impossible 
for English merchants to sell anything but carpets in 
the United States ; while American merchants can 
export increased quantities of wheat, corn, leather, and 
pork, and might even begin to export wool and cotton 
cloth to England. This change in the course of trade 
would finally oblige England to ship money to the 
United States to pay for an excess of imports. This 
money would raise prices in America while English 
prices would fall, until some American exports would be 
shut off and some English exports would increase. 



INTERNATIONAL VALUES. 385 

From this illustration we draw the following conclu- 
sions, which are valid explanations of the characteristics 
of international trade : — 

1. Shipments of money in payment of balances of 
indebtedness constantly cause changes in 

prices, and check exports ni the country 

receiving the money, while increasing exports in the 

country that makes the shipments. 

2. Changes in prices caused in this manner cut off 
the exports of those commodities in which there is the 
smallest difference between domestic and foreign prices. 

3. Those commodities in which there is the greatest 
difference between domestic and foreign prices will be 
continuously exported in spite of changes in prices. 

4. The normal result will be, in the long run, that 
each country exports mainly those commodities that 
show the greatest difference between domestic and 
foreign prices. Exports of other goods can be merely 
intermittent. Now, those commodities that can be pro- 
duced at the greatest advantage in price over foreign 
producers are the ones for the production of which the 
country offers the best advantages at the time heing. 
Other commodities are produced at a less advantage as 
compared with foreign producers, precisely because 
labor and capital are less efficient in producing them. 
To apply this principle practically, we may say that the 
whea,t, cotton, meats, oils, iron and' steel, cattle, wood, 
tobacco, leather, copper, and manufactured cottons that 
form the principal exports from the United States at the 

present time are the commodities which our merchants 

25 



386 PRINCIPLES OF ECONOMICS. 

can sell in the markets of the world at the greatest 
advantage over foreign producers. The coffee, sugar, 
wool, hardware, cotton and woolen manufactures, and 
the silk that we import are goods for whose production 
our advantages are not so great. We might produce all 
our woolen and cotton goods in this country, instead of 
importing a part of them as at present. But our capital 
and labor can do other things more advantageously, and 
so flow naturally into the production of those commodi- 
ties for which we have unparalleled advantages. 

§ 237. Movements of money from one country to 
another tend to make exports and imports of commodi- 
Thedetermi- *^®^ equal in the long run. When other 
nation of international obligations make a country a 
ternationai debtor to foreign nations, exports may ex- 
exchange, ^gg^ imports by the amount of this debt. 
Conversely, when a country has foreign debtors, imports 
may exceed exports proportionately. 

A country's exports represent the demand of other 
countries for her products, while the imports represent 

her demand • for the products of foreign 
Eaualization ^ ^ 

of internation- countries. The course of business tends 
constantly to equalize a country's demand 
for foreign products and the foreign demand for her 
own products, through changes in prices caused by 
shipments of money. An increased demand for foreign 
products, causing an excess of imports, will start ship- 
ments of money to foreign countries, and lower domestic 
prices. Exports will increase on this lower level of 
prices until they equal imports again. An increased 



RESTRICTION OF INTERNATIONAL TRADE. 387 

demand for foreign products tends to lower the prices 

of exports ; that is, it tends to render less favorable 

the terms on which foreign products are paid for. 

Conversely, an increased foreign demand for a nation's 

products tends to produce an excess of exports, and 

shipments of gold from foreign countries. This lowers 

prices in foreign countries so that they can pay for the 

larger quantity of goods demanded by exporting more 

goods on the lower level of prices. Foreign trade is 

more or less profitable to a nation in proportion as its 

demand for foreign products is less strong than the 

foreign demand for its products. 

A country that exports principally raw materials will 

have to incur heavier expenses for freightage than a 

country whose exports consist mainly of 

•^ ^ -' The burden 

manufactured goods. These heavier freight of freight 

charges for raw materials raise the prices ^ ^^^^' 

that must be asked in foreign countries ; hence, tend to 

decrease the demand for the products of the country that 

exports raw materials. Freight charges on manufactured 

goods affect prices less, and tend less to decrease the 

foreign demand. 

IV. Restriction of International Trade. 

§ 238. International trade is restricted to a greater 
or less degree by imposing customs duties upon goods 
that cross the borders of any country, customs taxes 
Duties imposed upon goods leaving a coun- o^^ duties. 
try are called export duties, and are not very common 
at the present day. But goods brought into a country 



388 PRINCIPLES OF ECONOMICS. 

are often taxed by import duties. Import taxes are 
specific or ad valorem according as they are assessed 
proportionately to the bulk of the commodities or to the 
value. 

§ 239. Sometimes import duties or tariffs are imposed 
solely to secure revenue for the government. When 
A revenue ^^^^ ^^^ ^^® ^^^® purpose of revenue, the 
t*^*- duties are made high enough to secure the 

maximum revenue, but not so high as to discourage im- 
portation more than is inevitable. The English revenue 
tariff aims, as far as possible, to tax only commodities 
that do not come into competition with products of home 
industries. This is done with a view to interfering as 
little as possible with business conditions. Such a 
revenue tariff will normally raise the price of the arti- 
cles taxed by about the amount of the duties. Importers 
who bring tea into England pay the government about 
$32,000,000 annually in customs duties, and then in- 
crease proportionally the prices charged for the goods. 
Indeed, the increase will usually be rather more than 
this, since, in order to pay duties, importers must have 
larger capitals invested in the business ; and the inter- 
est on these increased capitals must also be paid by 
consumers. 

When duties, laid for the main purpose of raising 

revenue, are imposed upon imported commodities that 

._do compete with products of domestic in- 
Revenue tariff ^ ... 

with inciden- dustry, a customs tariff gives "incidental 

protection " to domestic producers. Mer- 
chants cannot import competing foreign products with- 



RESTRICTION OF INTERNATIONAL TRADE. 389 

out having to pay the customs tax besides the price paid 
the foreign producer. Thus imported articles can be 
sold only at higher prices than formerly, and domestic 
producers may profit by increased prices of competing 
foreign products. The earliest tariffs imposed in the 
United States were revenue tariffs thafc purposely gave 
to domestic producers " incidental protection." 

§ 240. The restriction of foreign commerce that fol- 
lowed the embargo in 1807, and then the War of 1812, 
cut off most imports until the year 1815. protective 
This removal of foreign competition led to tariffs, 
a rapid growth of textile manufactures. Many of these 
textile establishments were poorly conducted, and when 
foreign competition began again in 1815, there arose a 
demand for more highly protective duties. In 1816 
customs duties were raised, particularly upon cottons 
and woolens ; and the tariff became a distinctly protect- 
ive tariff. From that time to the present the tariff 
laws of the United States have maintained a strong pro- 
tective character, although from 1846 to 1861 duties 
were reduced toward a revenue basis. In 1861 the 
Morrill Tariff Act restored duties to about the level of 
1845, but increased the duties on iron and wool. Then 
ensued the Civil War, in which the United States was 
obliged to lay its hands upon every source of revenue. 
In 1862 and 1864 "war tariffs" were passed imposing 
duties upon every possible import, and raising the rates. 
Moreover, very heavy internal taxes had been placed 
upon most important domestic manufactures ; and for 
this reason " compensatory " increases of duties were 



390 PRINCIPLES OF ECONOMICS. 

placed upon imports.^ After the Civil War the ex- 
penses of the government decreased, and a reduction 
of taxes began. Most of the internal taxes were re- 
pealed, but the war tariff was not lowered. Even the 
heavy " compensatory " duties on imports were retained 
after the repeal of the internal taxes that had caused 
them to be imposed. In 1867 a moderate reduction of 
duties was voted by the Senate, and received a majority 
vote in the House, but failed to pass the latter body 
because a two thirds vote necessary to suspend the rules 
could not be secured. For nearly twenty years the war 
tariff of 1864 remained unchanged in important particu- 
lars. In 1883 some duties were lowered, but others 
were raised, and the general character of the tariff re- 
mained the same. In 1890 the McKinley tariff removed 
revenue duties on raw sugar and some other articles, but 
increased, on the whole, the protective duties on articles 
that competed with domestic products. Then, in 1894, 
the Wilson tariff placed wool, copper, and lumber upon 
the free list ; re-imposed a revenue duty upon raw sugar ; 
and reduced irregularly the duties upon protected com- 
modities. Finally, in 1897, the Dingley tariff was 
enacted. This left copper on the free list, and lowered 
the duty on steel rails ; but it increased considerably 
most of the other duties. Wool and lumber were put 
back into the dutiable list, and a tax was placed on 
hides which had long been admitted free of duty. In 
some cases, as with wool, the duties were made higher 
than ever before. This law also substituted many 
specific duties in the place of ad valorem. Upon the 



RESTRICTION OF INTERNATIONAL TRADE. 391 

average, it imposes upon dutiable imports a tax of about 
fifty per cent of the value of the goods. 

§ 241. The general effect of a protective duty has been 
stated by a leading protectionist journal in such a clear 
manner as to command the entire assent The general 
of one of the leading free-traders of the protective 
United States : " A protective duty . . . has *^ty- 
for its object to effect the diversion of a part of the capi- 
tal and labor of the people out of the channels in which 
it would run otherwise into channels created or favored 
by law." 1 Before considering what is involved in thus 
diverting capital from one industry to another, the stu- 
dent must be reminded that there is often a difference 
between the immediate and the permanent results of 
economic causes. Both need to be considered, but it is 
easy to lose sight of the things that hold true in the 
long run. 

§ 242. The immediate effect of levying a protective 

duty (say of fifty per cent) upon a foreign product is 

to increase by that amount the expense of Detailed 

importino; the commodity. This normally effects of a 
. , . , . . 1 r. . -i protective 

mcreases the price at which the foreign prod- duty, 
uct must be sold. If the foreign product estabushment^ 
formerly sold at one dollar, the protective pf a particular 
duty will regularly raise its price to about 
one dollar and a half. This increased price is intended 
to induce domestic capital to enter this industry. Man- 
ifestly if domestic producers, before the duty was imposed, 
could have made a fair average profit from manufacturing 

1 rrom Philadelphia American. See Sumner, Protectionism, 16, 17o 



892 PRINCIPLES OF ECONOMICS, 

and selling the commodity at one dollar, no duty would 
have been needed to insure the investment of capital in 
this industry. The prospect of securing more than one 
dollar for the commodity may make it profitable for 
capitalists to undertake to produce it at home. 

The establishment of such a " protected industry '* 

adds nothing to the total amount of labor and capital 

2. Does not permanently invested in the country. It 

add to the merely diverts capital and labor from old 

total industry •' ^ 

of tiie country, industries or from the establishment of other 
new industries that would have been profitable without 
protection. A slight exception to this principle occurs 
when a protective duty invites foreign capital which 
would not have come to the country otherwise. But the 
amount of foreign capital brought to the United States 
by the tariff has never been more than a very small 
per cent of the new capital invested in industry each 
year. 

The immediate effect of establishing, by a protective 

duty, an industry that would not have been profitable 

otherwise, is to attract into a less produc- 

immediateiy tive industry capital that would have been 

less productive jj^yegf^et^ ^ more productive channels. What 

industries in ^ 

place of more is it that makes it possible for some Ameri- 
pro uc V . ^^^^ producers of wheat, corn, cattle, iron and 
steel products, cotton and cotton goods, leather, boots 
and shoes, tobacco, and oils to sell their products in 
foreign countries at prices that enable them to compete 
with any producers in the world, while other American 
producers cannot do so ? Simply the fact that the first 



RESTRICTION OF INTERNATIONAL TRADE. 393 

class of producers enjoys exceptional facilities. A pro- 
tective duty upon articles that we cannot as yet produce 
as cheaply as certain foreign producers, simply invites 
capital away from industries where we have unparalleled 
advantages into industries where our facilities are not 
so good. Its immediate effect, therefore, must be to 
decrease the productivity of the capital invested in the 
protected industry, and to cause economic loss. 

But it may happen that the industry established by the 
protective duty will prove to be one for which our pro- 
ducers have first-rate facilities. Inexperience 4. Mayexer- 
or other initial difiiculties may have been "sea different 

•^ permanent 

the only causes that prevented capitalists effect, 
from making a profit by producing the product at the 
price of one dollar. It may happen that, in a few years, 
the domestic producers can overcome these difficulties, 
and make a profit by selling the commodity at as low 
a price as the foreign producers. When this occurs, 
the industry would prove self-sustaining if the duty 
were removed; and it would become a more profitable 
instead of a less profitable industry. Tlien the eco- 
nomic loss would cease, and the ultimate result of the 
protective duty would have been to hasten the establish- 
ment of the industry. The word hasten is italicized 
because such an industry would be one for which the 
country had good advantages,— one which would have 
been quite sure to be established without protection, 
as the labor and capital force of the country increased. 
Protective duties may hasten the growth of such enter- 
prises ; but the economist must insist that they cause 



394 PRINCIPLES OF ECONOMICS, 

a less productive use of capital, hence an economic waste, 
until the industry becomes self-supporting. Then the duty 
should be removed, and the economic waste would cease. 
It is possible that experience under. a protective duty 
may show that the protected industry does not enjoy 
5. May fail such great advantages that producers can 
seK!sus^Lg aff^^d to sell at the prices charged by for- 
industries. eigners (in this assumed case, one dollar). 
This is merely a demonstration that the industry does 
not enjoy such superiority over foreign producers as 
other industries of the country possess. A protected 
industry that does not become self-supporting causes a 
permanent economic waste. The labor and capital in- 
vested in it could have been employed more profitably in 
some other industry. The disadvantage of the domestic 
producer over the foreigner may not be as great as the 
duty of fifty per cent imposed upon the foreign product. 
Domestic producers may be able to produce the protected 
commodity at a price of $1.25. If there is effective 
competition among producers, the price will be fixed at 
that figure. Then the protective duty of fifty per cent 
will have the ultimate effect of raising the price of the 
commodity only twenty -five per cent. In all cases, pro- 
tective duties raise the price of the commodity by the 
increased money expense at which domestic producers 
turn out the article. If domestic producers could afford 
to sell the protected commodity as cheaply as the foreign 
producers, no protective duty would be needed to estab- 
lish or to maintain the industry. But it has happened 
that domestic producers in the United States have com- 



RESTRICTION OF INTERNATIONAL TRADE. 395 

bined to raise prices behind the barriers of the protective 
duty. Thus, in the case assumed here, the domestic 
producers might be able to sell the commodity profitably 
at a price of 11.25. If they form a combination, they 
can maintain the price at 11.45 or 11.49, because the 
duty excludes foreign competition at any price under 
$1.50. As a matter of fact, a number of important pro- 
ducts are regularly sold to foreign customers at prices 
lower than those charged to American consumers. 

All agree that when a revenue duty is imposed upon 
a foreign product that is not produced by any domestic 
industry, importers add practically the whole 
duty to the price charged domestic consum- the foreign 
ers. The exceptions to this principle are ^^° ^^^^' 
not important enough to require mention here. But 
there is a dispute as to whether the foreign producer or 
domestic consumer bears the burden of a protective duty 
laid on competing foreign products. The principles laid 
down in the preceding paragraphs enable the question to 
be answered briefly. A protective duty can be deemed 
necessary to maintain an industry only so long as 
domestic producers are unable to produce the com- 
modity as cheaply as foreigners. If foreigners can sell 
the protected article for one dollar, and domestic pro- 
ducers cannot afford to sell it for less than $1.25, then 
the price will be fl.25 if the domestic producers are 
able to supply practically all the domestic demand, and 
if they do not combine to raise prices to 11.49, the limit 
set by the fifty-per-cent duty on the foreign product. In 
such a case domestic consumers bear a burden of twenty- 



396 PRINCIPLES OF ECONOMICS. 

five cents on each commodity bought. Foreign producers, 
moreover, will be unable to sell their goods in the domes- 
tic market unless they reduce the cost of production or 
adulterate their products, so that they can sell at 11.25 
after paying the duty. If they have other markets, 
they will cease to sell their products in the country that 
lays the duty. If they cannot find other markets for 
all their goods, they will try to cheapen their products 
in some way or other, or may temporarily sell at a lower 
margin of profits. It may happen that a part of the 
burden of a protective tax can be thrown temporarily 
upon the foreign producers in this manner, but domestic 
consumers are sure to bear a burden proportioned to the 
greater money expense at which the domestic product is 
produced. This burden on consumers ceases only when 
the domestic money cost of production becomes as low 
as the foreign cost. But then the protective duty is no 
longer necessary to maintain the industry. Finally, if 
the protective duties laid in America may throw part of 
their burden upon the foreign producers, it is also true 
that protective duties imposed by France, Germany, and 
other foreign countries may throw part of their burden 
upon the American exporter. 

If one or two industries only are given protection, 
7. One protect- ^^^^J ^^^^ profit by the increased prices that 
ive duty may c^n be secured for their products. But if 

neutralize the ^ 

advantages protective duties are extended to many m- 

producerrgaL dustries, SO that the prices of many commod- 

from others, j^jes are increased, then the duties conflict 

with each other. One industry may be given protec- 



RESTRICTION OF INTERNATIONAL TRADE. 397 

tion. Then other protective duties are almost certain to 
increase the prices of the materials or products necessary 
to build and equip the plants urjed in the first industry. 
Most American producers pay more for some of the 
materials and products used in equipping and running 
their industries than would be necessary without the 
protective duties. They are placed at just so much of 
a disadvantage as compared with English producers, 
who are able to buy all necessary materials in the 
cheapest markets. This increased expense of establish- 
ing and ruuning a business has prevented many Ameri- 
can industries from becoming able to compete success- 
fully with foreign producers. 

§ 243. The cost of producing a commodity is seldom 
exactly the same in any two establishments. Within 
any industry there may be ten or fifty differ- Biff erent costs 
ent costs of production. Some establish- of production, 
ments barely manage to pay expenses, while others make 
large profits from selling at the same prices that the 
first establishments receive. In protected industries 
some establishments may be self-supporting and able to 
sell at as low prices as foreign producers can offer, while 
others would be crushed by foreign competition if the 
protective duty should be removed. This is true of 
most of the protected industries at this moment. 

§ 244. Protective duties can divert capital and labor 

from one industry to another, but they can- 

•^ . What protect- 

not do many things that they are believed to ive duties 

1. 1 cannot do. 

accomplish. 
Protective duties do not increase the wealth of the 



898 PRINCIPLES OF ECONOMICS. 

country, as long as they are needed to maintain pro- 
^^ :. ^ tected industries in existence. Until thd 

They do not 

increase protected industry becomes able to produce 
at as low money cost as foreign indus- 
tries, there is a constant loss. It may happen that a 
protective duty may hasten the establishment of an 
industry which becomes self-supporting and exceedingly 
profitable. In such a case the protective duties cause 
an initial loss that may be counterbalanced by the ulti- 
mate gain of creating a very productive, self-sustaining 
industry earlier than it would have been established 
otherwise. In other cases, protective duties divert 
capital from more productive to less productive channels 
of investment, and cause a distinct loss. 

Protective duties cannot increase permanently the 
total industry of a country, as we have seen (§ 242). 
They do not It is sometimes said, for instance, that if we 
StaHMustary ^^^^ ^^^ imported 131,206,000 of silk goods 
of a country, in 1895, WO should have given just so much 
more employment to domestic labor and capital. But 
the labor and capital needed to produce those silk im- 
ports would merely have been diverted from some other 
industry in which they would have found investment 
sooner or later. In such a year as 1895, when uncer- 
tainty as to the future of our currency was paralyzing 
all business, it is probable that we had considerable un- 
employed labor and capital, some of which might have 
found investment in the silk industry. But, even in 
this case, increased protective duties would merely have 
caused this amount of labor and capital to be invested 



RESTRICTION OF INTERNATIONAL TRADE. 399 

earlier than otherwise. It would have caused no perma- 
nent increase of business. Moreover, these $31,206,000 
of silk imports were paid for by an approximately equiv- 
alent amount of exports. If a protective tariff cuts off 
suddenly 131,206,000 of imports, it will not instantly 
decrease exports ; for foreigners will buy and Americans 
will sell as long as prices make it profitable. But in the 
long run a decrease of 131,206,000 in imports will cause 
exports to exceed imports by just that amount from 
year to year. Foreigners will be unable to pay for this 
excess of exports by bills of exchange drawn against 
silk goods sold to Americans, as they used to do. Sooner 
or later they must pay for the excess in money. The 
inflow of money will ultimately tend to raise prices and 
so to cut off the export of goods that are now being ex- 
ported on a narrow margin of profit. A country cannot 
export unless it will also import. A reduction of imports 
by protective duties will ultimately lead to a decrease of 
exports. Finally, protective duties may lead to retalia- 
tory legislation by other countries, as the tariff of 1890 
probably did. If foreign countries increase the duties 
charged on the articles that we sell them, or impose 
other restrictions, then the decrease in our exports may 
happen immediately, instead of coming more slowly 
through changes in prices. 

It is said sometimes that we may keep our money at 
home by discouraging imports of foreign products. It 
is possible of course to diminish imports by protective 
duties ; and sometimes such action may cause exports 
to exceed imports, and lead to a net importation of gold. 



400 PRINCIPLES OF ECONOMICS. 

But such a condition can be merely temporary. The 
movement of money from country to country is auto- 
matic, depending upon comparative prices, 
increase per- If WO continually import gold, we tend to 
neTamountof ^^^^^ prices. Higher prices diminish ex- 
money re- ports. If the first decrease of exports does 
ceivedfrom ^ 

foreign not stop the excess of exports over imports, 

counnes. ^\^qt^ prices will continue to rise until ex- 
ports fall to the level of our diminished imports. A 
country will secure from the world's stock of money 
enough currency to enable its business to be done 
at the general level of prices that prevails in other 
countries. Nor can it permanently retain more than 
this amount. 

Wages in the United States are somewhat higher 

than in England. The American wage earner not only 

Thev cannot I'^ceives more mmiey than the English 

increase the worker, but also he secures with his money 

general rate mi • 

of wages in a greater amount oj commodities, ihe im- 

a country. portant thing is that the American worker 
receives more food, clothes, shelter, books, etc., than the 
English laborer, on the whole. Now, it is self-evident 
that American wages, expressed in terms of commodi- 
ties, cannot exceed English wages unless there are more 
commodities produced for the laborer to receive. Real 
wages, we repeat, cannot be greater in this country, 
unless our industry, as a whole, is productive of more 
commodities, of more consumable wealth. Now, a pro- 
tected industry, until it becomes self-supporting and 
no longer needs protection, is not as productive as the 



RESTRICTION OF INTERNATIONAL TRADE, 401 

unprotected industries which always have been selt 
sustaining. Consequently, a protective duty lessens 
production, and decreases by just so much the commodi- 
ties available for the support of laborer and capitalist 
alike.^ 

§ 245„ In this country certain industries have always 
been phenomenally productive, that is, they have yielded 
an unusually large product for each unit of Relation of the 
invested labor and capital. Money wages **^*u^^r^ 
in these industries, particularly in agricul- states, 
ture, have always been higher than in Europe. ^ Em- 
ployers could afford to pay higher wages because the 
labor was so productive that the money cost of produc- 
ing each unit of product was small. Now, other em- 
ployers could not induce laborers to work for them 
unless their industries were productive enough to en- 
able them to pay wages sufficient to induce men to 
keep out of agriculture and other self-sustaining indus- 
tries. The wonderful natural resources of our country, 
which are unsurpassed ; the energy, intelligence, in- 
genuity, and excellent industrial character of our labor 

1 Of course this presupposes that the share or proportion of the total 
product that goes to the laborers is not affected permanently bv the pro- 
tective duty. It would hardly be claimed seriously that such is not the 
case, and that the tariff permanently enlarges the share of the laborers in 
the total product. Least of all could this be true of the United States, 
where interest and profits are generally higher than in most European, 
countries. Neither would any one claim that manufacturers who favor 
protection do so because protective duties increase the proportion of the 
product paid to laborers, and decrease the proportion received by the 
employers. 

2 Evidence on this point runs back to the year 1645. See § 16 and 

§33. 

26 



402 PRINCIPLES OF ECONOMICS. 

force, — these are the causes that have made the prod- 
uct of our total industry large, and have raised the 
amount of commodities received by our laborers above 
the level of wages secured in foreign countries. There 
is no possible way by which the industrial population of 
one country can secure more commodities than foreign 
peoples except by producing more. Prior to 1789 wages 
were high without protective duties ; since that date they 
have remained higher than foreign wages, in spite of 
the fact that protective duties have diverted some capi- 
tal from more productive to less productive investments. 
The fundamental fact for the student to consider is 
that employers in unprotected industries have always 
p paid higher money wages than foreign em- 

unprotected ployers, but have enjoyed such advantages 
in natural resources and efficient labor that 
they could afford to pay more money wages, and yet 
sell their products as cheaply as the foreign producer. 
In the protected industries our natural advantages and 
the efficiency of our labor have not given employers so 
great advantages over foreign producers as our unpro- 
tected industries have enjoyed. Therefore they have 
been unable to establish business enterprises and to pay 
laborers as high money wages as unprotected employ- 
ers could offer, without having the price of their prod- 
uct increased by a tariff duty. This increase of price 
merely enabled them to pay the high rate of money 
wages that had always prevailed in the unprotected 
industries. The removal of all protective duties would 
not affect permanently the general rate of wages. It 



— RESTRICTION OF INTERNATIONAL TRADE, 403 

would close up some of the protected establishments, 
and the laborers employed there would be thrown out 
of employment. These unemployed laborers would tem- 
porarily cause an over-supply of labor, and their com- 
petition might reduce money wages in some other 
industries. But sooner or later these displaced labor- 
ers would find employment in new self-sustaining in- 
dustries, and money wages would rise again. The 
result would be like the invention of a labor-saving 
machine that throws thousands of laborers out of em- 
ployment. Temporarily these unemployed laborers tend 
to depress wages in other industries. Ultimately they 
find employment in new industries made possible by 
the invention of the machine ; and wages do not per- 
manently remain depressed. 

In this country the relative number of laborers whose 
employment in protected industries depends directly 
upon the protective tariff is usually exag- The number of 
aerated. In 1880, it appeared that there laDorersaf- 

° J rr fected by pro- 

were 7,299,000 farmers who were not af- tecuve duties 

fected directly by the tariff.^ Further, tiveiyintiie" 
5,884,000 producers, engaged in trade or united states, 
transportation, or in professional and personal services, 
were not affected directly by the tariff, since their 
work has to be done in this country and cannot be 
done abroad. Finally, 3,837,000 producers were em- 
ployed in manufactures, mining, and mechanical pur- 

1 This figure excludes one half the agricultural population of Maine, 
New Hampshire, Vermont, and New York as possibly affected by Cana- 
dian competition. See Laughlin, in Shaw, National Revenues, 181-184. 



404 PRINCIPLES OF ECONOMICS. 

suits. But of these, 2,216,848 were employed as bakers, 
blacksmiths, carpenters, masons, etc., — whose work must 
be done in this country and cannot be done elsewhere, — • 
or were employed producing goods that were exported 
to foreign markets and sold at prices as low as any in 
the world. This made about 15,400,000 workers who 
were not directly dependent upon the tariff for their 
employment, and only 1,990,000 laborers whose posi- 
tions could be directly affected by protective duties.^ 
Even of these 1,990,000 laborers in the so-called pro- 
tected industries it is probable that many were em- 
ployed in establishments of superior efficiency which 
would not be obliged to close by a withdrawal of pro- 
tective duties. These figures show the absurdity of 
supposing that the wages of less than 1,990,000 pro- 
tected laborers were able permanently to keep the 
wages of 15,400,000 unprotected laborers fifty per cent 
above the wages paid in foreign countries. 

§ 246. While protective duties do not add perma- 
nently to the invested capital or the total industry of 
The advisabu- a country, and while they do cause an 
ing protective Gconomic loss as long as the protected in- 
duties. dustries are not self-supporting, it is some- 

times possible to favor them on other grounds. The 
economic waste of sustaining by protection an industry 

1 The Census of 1900 shows the following results : agriculture, 
10,381,765 persons ; professional and personal services, 6,839,195 per- 
sons; trade and transportation, 4,766,964 persons; manufactures, me- 
chanics, and mining, 7,085,309 persons. By consulting the Twelfth 
Census Special Report on Occupations, the student can make the 
necessary deductions from Class i. and Class iv. 



RESTRICTION OF INTERNATIONAL TRADE. 405 

that is not self-supporting should be frankly admitted, 
but it may be fairly argued that sometimes this economic 
loss is counterbalanced by a greater gain. 

Political reasons make it very advisable that a nation 
should be able to produce its own military armaments 
and materiel of war. Also, it may be polit- Protective 
ically advisable for a nation to produce its be justified 
principal necessities of life, in order to be ^ounds!^^ 
independent of other nations in case of war. Military 
and political considerations often must outweigh con- 
siderations of a purely economic character. 

In a new country, such as the United States a cen- 
tury ago, capital is often scarce, as compared with the 
demand for it ; the labor force is insuffi- Protection 
cient and high-priced ; and the money ex- industries, 
penses for capital and labor are high. These greater 
expenses retard the development of industries where 
unusual natural resources cannot be utilized immedi- 
ately, where the greater efficiency of labor and capital 
does not compensate immediately for their greater cost. 
In the infancy of a country's industrial development it 
may be wise to aid a few industries by protective duties. 
These duties raise the prices more or less, but they 
enable the employer to overcome the initial disadvan- 
tages that confront him. Such protection should be 
extended for a reasonable time only, until the infant 
industry can get upon its feet and support itself. 
But each case in which protection is demanded should 
be considered very carefully upon its own merits. 
Moreover, such protection can be extended only to 



406 PRINCIPLES OF ECONOMICS. 

a few industries. If protective duties are levied on 
all possible competing products, one tends to neutral- 
ize the advantage conferred by another. Protective 
duties must, so long as they are needed to support an 
industry, give that industry encouragement at the ex- 
pense of all who pay the higher prices. If the protected 
industry soon becomes self-supporting, then the duty 
may be abolished, and the industry may be thenceforth 
advantageous to all interests. The danger with protect- 
ive duties designed to foster infant- industries is that the 
infants are seldom willing to give up the protection once 
accorded to them. In this country, after eighty years of 
protection, our "infant industries" oppose the removal 
of the protective duties. At the present time the infant- 
industry argument has little force when applied to the 
conditions existing in the United States, for this coun- 
try is no longer in its industrial infancy. 

It is impossible to discuss in this chapter all of the 
arguments advanced in favor of protective duties, but 
other argu- the student should examine them in the 
™otecti°^e light o^ the principles explained in the pre- 
duties. ceding paragraphs.^ One of these is con- 

nected with the infant-industries argument. It is 
claimed that a young or an undeveloped country needs 
protection in order to diversify its industry. Without 
protective duties, the young country will devote all its 
energy to the production of a few raw materials for 
which it has great advantages ; it will not utilize its 

1 See Smith, Wealth of Nations, Bk. iv. Chap. 2, for a few other cases 
where protective duties mav be justified. 



RESTRICTION OF INTERNATIONAL TRADE. 407 

other natural resources ; and will give no opportunity 
for the development of the skill that its population 
may possess for manufacturing pursuits. In a country 
possessed of few natural advantages, whose inhabi- 
tants have little energy, self-reliance, or progressiveness, 
it might be advantageous to resort to a few protective 
duties in order to give labor and capital the initial im- 
pulse toward a diversification of industries. This policy 
would cause loss, and would be expensive ; but it miglit 
have certain advantages in the long run. In the United 
States such considerations have very little force. Our 
natural resources are too numerous and varied to make 
it possible for us to be shut up to the production of raw 
materials. In the eighteenth century, in spite of English 
competition and in the face of Parliament's prohibitory 
legislation, we established several lines of manufactures. 
After 1789 our capital and labor were invested in foreign 
commerce, until we did a large part of the carrying 
trade of the world. This was accomplished, not " by 
protection and bounties, but by unwearied exertion, by 
extreme economy, by unshaken perseverance, by that 
manly and resolute spirit which relies on itself to pro- 
tect itself." ^ Since 1816, there have been periods when 
protective duties may reasonably be claimed to have 
hastened the growth of manufactures, but it cannot be 
shown that manufacturing industries would not have 
continued to develop, even without temporary protection. 
It can be seen that differentiation of industry would 

1 See Webster's speech of 1824, State Papers and Speeches on the 
l^arife, 330. 



408 PRINCIPLES OF ECONOMICS. 

have taken place without protection, if we merely look 
at what has happened in the internal trade of the coun- 
try. The Constitution assured us freedom of trade 
throughout the length and breadth of our land. Now, 
have the newer sections been unable to diversify their 
industries in the face of the competition of the further- 
developed industries of the Northeast ? From the very 
start hand-trades and mechanical pursuits, that must be 
carried on in the locality where needed, grew up beside 
agriculture. Then began the manufacture of coarse 
products, such as coarse cotton goods in the South, and 
coarser leather, iron, and woolen goods in the West. 
Gradually the manufacture of coarser products has 
moved from the East to the West and South, while the 
older states have had to devote themselves to the pro- 
duction of finer goods of all sorts. No one doubts that 
the West and South will gradually develop these finer 
grades of manufacture, as their population and capital 
increase ; but meanwhile they have very wisely devoted 
much energy to agriculture and other pursuits in which 
they have unparalleled advantages. With its energetic 
and intelligent labor force, with various and unrivaled 
natural advantages, diversity of occupations in the 
United States was as sure to occur as the subjugation of 
our territory to the uses of civilization. In the economic 
development of our country the tariff has been a factor 
of minor importance. 

§ 247. The limits of this chapter do not permit more 
than a brief treatment of the fundamental facts and 
principles that underlie the tariff question. The student 



RESTRICTION OF INTERNATIONAL TRADE 409 

should be reminded, however, that our protective tariff 
has existed for a long time, and has diverted a great 
deal of labor and capital into investments our present 
that would be ruined by a sudden abolition tariff is an 

• T • k -, n historical 

of protective duties. At ieast five per cent product, and 
of the labor force of the country (certainly ™eated\s 
not more than ten per cent) is now en- s"<^^- 
gaged in business enterprises which could not continue 
to exist if protection should be removed entirely. 
To compel this portion of our labor force, and a cor- 
responding amount of capital, to find immediate in- 
vestment elsewhere would cause great hardship to all 
interests. In most of the so-called protected industries 
many establishments, perhaps a majority in such indus- 
tries as the manufactures of cotton and steel, would 
prosper under free trade ; but the less efficient establish- 
ments would have to be closed up. Nevertheless, it is 
desirable and feasible to effect a gradual withdrawal of 
labor and capital from enterprises that cannot become 
self-sustaining.i 

1 In the words of Adam Smith, " the equitable regard " for the inter- 
est of the protected industry " requires that changes of this kind should 
never be introduced suddenly ; but slowly, gradually, and after a very long 
warning." " The legislature . . . ought, upon this very account, perhaps, 
to be particularly careful neither to establish any new monopolies of this 
kind, nor to extend further those which are already established. Every 
such regulation introduces some degree of real disorder into the constitu- 
tion of the state, which it will be difficult afterwards to cure without oc' 
casiouing another disorder." 



410 PRINCIPLES OF ECONOMICS, 



LITERATUEE ON CHAPTER XIII. 

General References: Andrews, Institutes of Economics, 
92-101, 113, 114, 124; Bastable, Theory of International Trade; 
Bastable, The Commerce of Nations; Cairnes, Leading Prin- 
ciples of Political Economy, 297-406 ; Ely, Outlines of Economics, 
280-285 ; Ely, Problems of To-day, 1-86 ; Goschen, Theory of 
Foreign Exchanges; Hadley, Economics, 421-445; Macvane, 
Political Economy, 323-363, 381-386 ; Mill, Principles of Political 
Economy, Bk. III. Chaps. 17, 18, 19, 20, 21, Bk. V. Chap. 10; 
Roscher, Political Economy, Appendix, II. and III.; Smith, 
Wealth of Nations, Bk. IV. ; Walker, Political Economy, 111- 
120, 448-463, 505-517; Nicholson, Principles of Political Econ- 
omy, II. 235-328 ; Clare, The A B C of the Foreign Exchanges, 
A Money Market Primer. 

Special References on the Tariff History of the United 
States: Grosvenor, Does Protection Protect? Hill, First 
Stages of the Tariff Policy of the United States ; Rabbeno, Amer- 
ican Commercial Policy ; Statistical Abstract of the United States, 
1896 ; Sumner, History of Protectionism in the United States ; 
Shaw, The National Revenues; Taussig, Tariff History of the 
United States, State Papers and Speeches on the Tariff; The 
Existing Tariff upon Imports ; Young, Report on Customs Tariff 
Legislation of the United States. 

Special References in Favor of Protection : Bowen, Ameri- 
can Political Economy; Carey, Manual of Social Science ; Gunton, 
Social Economics, 320-361 ; List, National System of Political 
Economy; Patten, Economic Basis of Protection; Roberts, 
Government Revenue; Thompson, Social Science and National 
Economy. 

Special References in Favor of Free Trade: Bastiat, 
Sophisms of Protection; Perry, Principles of Political Economy; 
Sumner, Protectionism. 

Special References on the Financial Aspects of Customs 
Taxes: Bastable, Public Finance, 489-509; Ely, Taxation, 
79-93 ; Plehn, Public Finance, 182-207. 



SOCIAL INCOME. 411 



CHAPTER Xiy. 

THE DISTRIBUTION OF WEALTH. 
I. Social Income. 

§ 248. The wealth of a society at any time consists of 
all its accumulated material goods, whether more or less 
durable, whether capital ffoods or consum- „ . , 

' ^ ° Social wealth 

able wealth, and all personal services that and social 
it has at its disposal. It is impossible to 
measure and compute the various personal services that 
form part of the social wealth at any moment ; so that 
the common conception of social wealth is limited to 
the material possessions of a community. 

The monthly or annual income is to be distinguished 
carefully from the wealth of a society. The social income 
depends chiefly upon the use that is made 
of the social wealth. It depends upon the 
degree in which the natural resources of a country and 
the personal faculties of its inhabitants are utilized 
for the production of material goods or personal services ; 
upon the manner in which capital is employed in creating 
new wealth ; and upon the extent to which durable con- 
sumers' goods, the products of past industry (for example, 
dwelling houses, works of art, books, etc.), are made to 
yield the satisfactions that they have the power to confer. 



412 PRINCIPLES OF ECONOMICS. 

In tliis way the social income for any month or year may 
be divided into four constituent parts : — 

1. The satisfactions derived from durable consumable 
goods, the product of past industry, that still remain in 
the.possession of the community and add to its material 
enjoyments. 

2. The personal services at the disposal of the society 
during the period for which the income is computed. 

3. The material goods of a consumable character that 
are the product of the current industry for the period 
considered. 

4. The producers' goods, or capital, created by the 
current industry of the period, and available for the pro- 
duction of economic goods during following periods. 

If we conceive of social wealth as an accumulation or 

fund of economic goods, then social income should be 

conceived as a continual flow of personal 

Social income '^ 

afiowofeco- services, consumable material wealth, and 
nomic goo s. p^Q^j^^jgi^g' goods or capital. National pros- 
perity depends less upon the amount of wealth than 
upon the utilization of the national possessions in deriv- 
ing the annual income. In this chapter we shall study 
the methods by which the social income is distributed 
among the individuals, or classes of individuals, that 
compose the society. 

§ 249. The general causes tbat determine the amount 
Causes that of the social income have been discussed in 

determine the ^j-^^ chapter treating^ of the production of 
amount of the ^ ^ ^ 

sociaiincome. wealth. But the following facts need to be 
mentioned here : — 



SOCIAL INCOME. 413 

1. Of the four constituent parts of social income, 
as enumerated in the preceding section, the first is quite 
independent of the enterprise and tlie labor of society 
in the period during which the income is estimated, 
and depends upon past production. The last three 
parts vary with the productivity of tlie labor of society 
during the period under consideration, and depend upon 
current production. 

2. Considering now simply these last three parts of 
social income, which are the output of current industry, 
we know that they are produced by capitalistic methods 
of production. This is especially true of the consumable 
material goods and the capital goods that form the last 
two parts of social income. 

3. The use of capital in production has increased 
marvelously during the last century, so that the effi- 
ciency of the labor of any society depends very largely 
upon the amount and kind of capital utilized in produc- 
tion. An increase of the labor force or a gain in the 
efficiency and energy of the present laborers would re- 
sult in a considerable increase in the productivity of the 
industries of any society. But without an increase of 
capital tliere would be strict limits to the increased pro- 
ductivity caused in this way. Capital now performs 
such a large share of the work of production, and is re- 
sponsible for such a great proportion of the efficiency of 
modern industry, that the social income of consumers' 
goods and producers' goods cannot be increased very 
greatly unless the amount of capital is first increased. 
In other words, that part of the social income which is 



414 PRINCIPLES OF ECONOMICS. 

composed of the products of current industry depends at 
any period very largely upon the capital used in produ(> 
tion. It follows, therefore, that the social income of the 
people of the United States during the year 1896 de- 
pended very largely upon the capital that had been 
accumulated and applied to production prior to that year. 
More labor or more efficient labor might have increased 
the year's income considerably, but the product of our 
industry was profoundly dependent upon capital pro- 
duced by the labor of previous years. 

§ 250. All private incomes, whether of capitalists, 

laborers, landowners, or employers come out of the 

social income of the society. The income of 

Private in- '' 

comes and one class may increase at the expense of 

social income. ,, i . •> • Mir j.i 

others ; but it is possible for the incomes 
of all classes to increase only when the general social 
income is enlarged. In so far as the amount of the 
social income is dependent upon the capital employed in 
productive industry, the incomes of all classes of society 
are dependent upon the capital produced by the industry 
of the past. 

II. Private Income. 

§ 251. The income of an individual may be considered 

to be a certain portion of the material goods or personal 

„ , , services that make up the social income. 

Real and ^ 

money In this sense economists speak of real in- 

income. , , . rni, 

come, as opposed to money income, ihe 
latter consists of income expressed in terms of money. 
This distinction is important. It is possible to increase 



PRIVATE INCOME. 415 

money incomes without increasing real incomes. If the 
currency of the United States should be doubled in any 
year, money incomes of many persons might be increased, 
but the simultaneous increase of prices would wholly or 
partially offset the increase of money incomes. Mani' 
festly an increase in money incomes due to such a cause 
as this does not affect the real income of the country in 
any particular. So, in comparing the money incomes of 
laborers in one country with those of another, it is neces- 
sary to compare the relative purchasing power of money 
in respect to those commodities which the laborer con- 
sumes. Higher money wages may or may not indicate 
higher real wages and a greater degree of prosperity of 
the laboring classes. 

§ 252. Private incomes are regularly expressed and 
measured in terms of money. A money income may be 

considered a demand upon the current prod- 

^ ^ Money in- 

uct or past accumulations of society for any comes further 
commodities or services that the receiver of 
the income desires to purchase. Money incomes are 
regularly expended for the commodities or services that 
constitute the real income of the receiver. Only in a few 
cases are money incomes hoarded. When money is de- 
posited in a bank, the depositorof the money really lends 
to some other person the right to demand commodities in 
the present, in return for the right to receive at some 
future time an equivalent income. Money incomes are 
expended for the following things : — 

1. Services or consumable commodities, the product 
of current industry. 



416 PRINCIPLES OF ECONOMICS. 

2. Durable consumable goods, the product of past in- 
dustry, as in the purchase of a house or book produced 
in previous years. 

3. Producers' goods or capital, the product either of 
current or of past industry. 

§ 253. In treating of the distribution of the real income 

of a society among its individual members, we have to 

consider primarily the causes that affect 

The distribu- ^ , ^ 

tion of money the money incomes received by individuals. 
Within any social group, the real income 
of one individual will be larger or smaller than the real 
incomes of other individuals roughly in proportion as his 
money income is larger or smaller. Between different 
groups prices may be so different that this will not hold 
true. 

III. Primary and Secondary Distribution, 

§ 254. Considering now the money incomes received 
by individuals, we must notice that the first process 
Primary bj which private money incomes are deter- 
distribution. j^jned is the sale of products and services 
in the market. Material goods and services are sold for 
money, then the necessary expenses of production are 
paid, and a net income is secured. This is the primary 
fact in the distribution of money incomes among indi- 
viduals, and may be called the primary process of 
distribution. 

Suppose a farmer to own his land, buildings, live stock, 
machinery, and tools. Suppose him to perform all the 
labor of carrying on the farm. Then suppose that the 



PRIMARY AND SECONDARY DISTRIBUTION. 417 

sales of the products from the farm amount to $2,500 
annually, while the expenses for purchasing seed, re- 
newing the land, repairing buildings, and pjimaiy 
keepins; the stock and implements in ffood distribution 

. ^^r/^^ -, iUustrated 

condition, amount to f 1,500 each year, by the case 

Then the farmer will have a gross income ° ^ armer. 

of 12,500 and a net income of |1,000. For him the 

distribution of wealth means simply the sale of his 

products and the payment of the expenses of running 

the farm.' 

Assume other cases. A physician may own all the 
capital used in his profession. He gets his gross in- 
come by selling his services, and receives a other 
net income proportioned to the excess of his illustrations, 
gross income over the expenses of carrying on his busi- 
ness. So witk a shoemaker, a tailor, or a proprietor of 
a small store, who may own his capital and land and do 
all his own work. 

§ 255. Now, if all production were carried on by men 
who owned all the land and capital used in business, per< 
formed all the necessary labor, and carried on ^eed of a 
the enterprises on their own responsibility, p^o°^.ggg^ 
the distribution of wealth would comprise distribution, 
nothing but the simple process of primary distribution. 

^ Commonly a farmer gets a part of his income by consuming some of 
his products on the farm. Here he receives his real income directly, with- 
out receiving a money income that must be expended for' the real income. 
Yet, if the farmer should keep his books carefully, he ought to esti- 
mate the market value of all products consumed on the farm, and add 
this sum to the money income secured from the sale of products in the 
market 



418 PRINCIPLES OF ECONOMICS. 

But in modern business, we find two distinct classes c. 
income receivers : — 

1. Persons who secure a primary income from man- 
aging business on their own responsibility, and selling 
products or services for more than the expenses of 
producing them. 

2. Persons who have business relations with the re- 
ceivers of primary incomes. These persons may be 
laborers who agree to work for other men who bear the 
responsibility of furnishing capital and of assuming the 
risks of management. Second, they may be investors 
of capital who do not desire to assume the risks and 
responsibility of investing in a business that they must 
manage for themselves. Such capitalists often lend 
their capital to active business men. Third, they may 
be landowners who own land which they do not desire 
to utilize, and prefer to rent to men who do wish to 
use it. 'These three classes, hired laborers, lenders of 
capital, and landlords, receive secondary, or derivative, 
or dependent incomes from the persons who carry on 
industry on their own responsibility. 

§ 256. The distribution of secondary incomes depends 

primarily upon the legal relations that exist between 

The position of the independent employers, the responsible 

^^se^ndi? managers of business enterprises, on the 

distribution, one hand, and the dependent capitalists, 

landlords, and laborers, on the other. 

An employer, or a responsible manager of a business 
enterprise, usually has some capital of his own that he 
invests in the business undertaking. If he fails to 



PRIMARY AND SECONDARY DISTRIBUTION. 419 

sell his products for more than the expenses of pro- 
ducing them, he must meet all expenses con- 
tracted, even if this has to be done out of his or responsiWe 
capital. The fate of the business depends 
upon his ability ; and, if he incurs a loss, he alone is re- 
sponsible. In a common partnership each member risks 
all his property for the debts of the firm, while the limited 
liability of the business corporation limits the risk of the 
investors to the amount of the capital invested by them. 
On the other hand, the employer or manager secures all 
the profit when the business is successful. 

Capitalists and landowners who lend capital and land 
to the active managers of business enterprises, agree to 
place their capital and land at the disposal of 
the managers for a definite period of time, capitaUst 
in return for interest or rent paid out of the 
gross income of the business. If the manager is unable 
to pay interest and rent, or to return the capital when 
the time for repayment comes, out of the gross income 
of the business, then he must draw upon his own capital 
for the necessary sums. The lenders of land and capital 
avoid much of the risk which the active manager as- 
sumes. The lenders can lose only when the business 
fails so badly that the capital loaned, or interest and 
rent due, cannot be recovered out of the assets of the 
enterprise. The capital of the manager serves as a buffer 
to protect the lenders from loss. On the other hand, 
lenders of capital and land receive only fixed payments, 
and have no share in any unusual profits that may coma 
from the business. 



420 PRINCIPLES OF ECONOMICS. 

The employer must also pay the hired laborers the 
wages agreed upon, even if this has to be done out of 
The hired ^^^^ capital. In many states the hired 
laborer. laborer has a " mechanics' lien " upon the 

product of the business, and is almost in the position 
of a preferred creditor. At the same time he regularly 
has no share in the profits that may be realized. 

§ 257. There is still a third process by which private 
incomes are determined. Men who own dwelling houses, 
Tertiary ^^' l^n^ for residence sites, or some other 
distribution, durable good, may derive an income from 
renting them to other persons in return for stipulated 
payments. Such goods are not used in what is technic- 
ally called productive industry. They are durable con- 
sumption-goods, for whose use other people are willing 
to pay money to the owners. The persons who agree 
to make such payments may be independent employers, 
or dependent capitalists, landowners, and laborers. In 
other words, the interest or rent paid for the use of 
durable consumption-goods may come out of either pri- 
mary or secondary incomes. The owners of such dura- 
ble consumption-goods consider them to be a part of 
their private capital, since they derive an income from 
them. In everyday speech, such goods may be called 
capital. But the student must notice that they are 
private, acquisitive capital merely ; that is, they are the 
means by which private individuals secure a share of 
the social income. These durable consumption-goods 
are not used in what the economist defines technically 
as the production of wealth. 



CLASSIFICATION OF PRIVATE INCOMES. 421 

IV. General Classification of Private Incomes. 

§ 258. From another point of view, it is possible to 
classify private incomes as follows : — 

1. Incomes received by responsible man- ^ „^ 

"^ ^ Profits, wages, 

agers of business enterprises. These are interest, and 
commonly called profits. 

2. Incomes received by laborers for their personal ex- 
ertion in producing material goods or services. These 
are called wages or salaries. 

3. Incomes received by owners of productive capital 
loaned to managers of enterprises, or by owners of dura- 
ble consumption-goods loaned to other persons. These 
incomes are termed interest. 

4. Incomes received by owners of land rented for 
business enterprises, or rented for use as residence 
sites, and for purposes that are not connected with the 
technical process of wealth production. Such an income 
is called rent. 

§ 259. Suppose a manufacturer to own an acre of 
land and |20,000 capital. He invests 120,000 in build- 
ing and equipping a factory, of which sum 
he borrows $10,000 at six per cent interest, of these forms 
This will leave him 110,000 of his own cap- 
ital, which he invests and re-invests in hiring laborers 
and buying materials. Suppose that he rents an addi- 
tional acre of land for use in the business, agreeing to 
pay an annual rental of |400. Then he hires twenty 
laborers at annual wages of |600 each. Each year he 
is obliged to spend |2,000 for repairing his buildings 



422 PRINCIPLES OF ECONOMICS. 

and keeping his machinery in good condition ; while his 
taxes and insurance amount to |600 annually, and mis- 
cellaneous expenses to |400 more. In the course of the 
year he turns out a product for which he receives a gross 
return of $30,000. In so doing he spends 110,000 for raw 
materials, etc., so that he has 120,000 available for meet- 
ing his other expenses. These expenses are, first, $2,000 
for repairs, $600 for insurance and taxes, and $400 for 
miscellaneous expenses. This leaves an income of 
$17,000 available for meeting his other obligations. 
These are: $12,000 for wages, $600 for interest, and 
$400 for rent. After paying these last expenses he has 
a gross profit of $4,000 on the year's business. But it 
is often customary to divide these gross profits into cer- 
tain constituent parts. The manufacturer has $20,000 
invested in the business, on which he could have secured 
six per cent interest without incurring the risks and 
trouble of establishing and running the enterprise. 
Therefore he will estimate that $1,200 of these gross 
profits represents interest on his invested capital. Sim- 
ilarly he owns an acre of land which could have been 
rented for $400. Consequently, he will estimate that 
$400 of the gross profits represents merely the rent of 
his land. His net profits, therefore, due to his enter- 
prise in establishing the industry will be $4,000 — 
($1,200 -|- $400) = $2,400. We shall now proceed to 
consider the causes that affect the terms upon which a 
manager hires laborers, borrows capital, and rents land, 
and the causes that make it possible for him to derive a 
net profit from his business. 



INTEREST. 423 

V. Interest, 

§ 260. In studying the production of wealth, we saw 
that social, or productive, capital is an important factor, 
and we defined capital as the produced instru- 

f. . , T . T Private or 

ments of indirect production. In studying acquisitive 

the distribution of wealth, we have seen that *^*i*^^- 
men secure incomes, not only from those forms of pro- 
ductive capital that are reduced to private ownership, 
but also from durable consumers' goods, such as houses, 
etc.i In popular speech, every possession of an individ- 
ual that is a means of securing a money income is called 
capital.2 The economist needs, therefore, to recognize 
that capital in distribution plays a different part from 
what it does in production. In distribution, we consider 
methods by which private individuals acquire incomes. 
Capita], therefore, must be viewed as a means of private 
acquisition, not as a means of producing social wealth. 
We define private or acquisitive capital as any product 
of human industry that serves as a source of income to 
individuals. It includes : — 

1. Those forms of social or productive capital that 
are subject to private ownership, and serve as sources of 
income to individuals. Land is not included here, and 
must be considered separately. 

1 Carriages rented by liverymen, and books rented by a circulating 
library, are other examples of consumers' goods, used as means of secur- 
ing money incomes. 

2 Even land is included in the popular conception of private capital. 
This should not be included by the economist, however, since land is not 
produced, and the income received from it differs from the income secured 
from other forms of private capital. 



424 PRINCIPLES OF ECONOMICS. 

2. Those durable consumers' goods that can be 
" rented " to others, and serve as sources of private 
income to their owners. 

§ 261. Interest is paid, first of all, for the use of pro- 
ductive capital. Now such capital is worthless in itself, 

but is very valuable when used in the pro' 
The value of "^ ^ 

productive duction of economic goods. What deter- 

^^^^ ' mines its value ? For instance, what deter- 

mines the value of a machine or a factory ? The value 
of capital, like that of any other product of industry, is 
determined primarily/ by its marginal utility. In the 
case of capital, the marginal utility depends upon the 
utility of its marginal product. But if competition is 
free, then the expenses of production will exert an in- 
fluence on the supply. Ultimately the price received 
for a machine, or any other form of productive capital, 
will be such as equalizes the utility of the marginal prod- 
uct with the marginal expenses of production. On the 
othci." hand, when some element of monopoly, such as a 
patent right, prevents competition from operating, tlie 
price of the capital good will be fixed at the point of 
highest net returns. 

Interest is also paid for the use of durable con- 
sumers' goods such as dwelling houses. The question of 

The value of ^^^® value of such goods needs no further 

durawe goods, explanation. 

§ 262. In the case of a long-time loan, such as a 

mortgage loan on real estate for a term of years, or an 

investment in the bonds of a corporation, interest is 

paid for the use of capital. Many errors' spring from a 



INTEREST. 425 

failure to perceive that such a long-time loan is really 

a loan of productive capital in the form of 

. . Short and 

machinery and buildings, and not a loan of longtime 

money. The loan may be made in money, °^^' 
but the money is immediately invested by the borrower 
in some form of productive capital. Money serves 
merely as an instrument for effecting this loan of 
capital. Such loans, and the rate of interest upon 
them, are not affected by the amount of money in cir- 
culation, as will be shown. 

Short-time loans are somewhat different. They are 
usually made by bankers, and may be either call loans, 
payable on the demand of the lender, or short-time 
thirty-, sixty-, and ninety-day loans, which loans are more 
bankers make by discounting commercial of money, 
paper. Short-time loans are required by merchants 
Avho have contracted debts in buying raw materials or 
stocks of finished products, and must make payment for 
them before the goods can be sold again. Such mer- 
cliants continually borrow money on call or for thirty, 
sixty, or ninety days. They desire immediate means of 
payment, and expect in a few weeks to return the money 
borrowed when they dispose of their products. Short- 
time loans constitute a demand for means of paying 
debts. They are affected, therefore, by temporary 
changes in the money market. 

§ 263. Productive capital is valued in terms of money. 
When a man borrows productive capital, the loan is 
commonly expressed in terms of money, and a certain 
per cent of the principal is agreed upon as the rate of 



426 . PRINCIPLES OF ECONOMICS. 

interest. Two questions must now be examined : First^ 
The rate of Why is it that the person who lends pro- 
proSictive ductive capital can secure this interest or 
capital. premium for the loan ? Second^ What deter- 

mines the rate of interest that such a person can 
secure ? 

The payment of interest for a loan of capital is not 
explained by simply showing that capital serves to in- 
crease production, to improve the quality of 
Interest anses ^ ' ^ ^ j 

from differ- the product, and to secure products that 
the value of would be unattainable otherwise. If men 
present aM ^ould be willing, without receiving interest, 
to accumulate enough capital to carry on 
the business of the world, then no one could secure 
interest. But this is something that cannot be ex- 
pected. If a person has .11,000, he can expend it for 
consumers' goods that are available immediately. If 
he invests it in capital, he can secure a return only after 
some time has elapsed. When he invests $1,000 in 
productive capital, he converts a present available in- 
come into such a form that it is available only in the 
future. Now, persons will not exchange a present in- 
come of $1,000 for a future income of only $1,000. 
This is for two principal reasons : First^ the future is 
always more or less uncertain, and " a bird in the hand 
is worth two in the bush." Second, even when the 
uncertainty and risk of the future are reduced to a mini- 
mum, most persons underestimate or undervalue future 
pleasures and pains. But many people are willing to 
invest $1,000 of income in capital so that it will be un- 



INTEREST. 427 

available for a year, in return for $1,050 at the end of 
that period. The |50 premium would be interest in 
this case. It would be a premium added to the princi- 
pal of the loan, available only at the end of the year, 
in order to make it equivalent to a present income of 
11,000. Interest is paid, therefore, as a premium to 
equalize future goods or future income with present 
goods or income, in the estimation of possible investors. 
Capital formation implies a willingness to invest pres- 
ent income in producers' goods that are available only 
in the future. Interest is the inducement necessary to 
insure the formation of enough capital to meet the needs 
of business. 

Capital may be furnished by three classes of persons. 
First, it may come from rich persons with large incomes, 
who can easily save lar^e amounts of income 

■^ ° The supply 

and invest them in capital. Second, it may of productive 
be supplied by persons of moderate means ^^^^ 
who wish to provide for the future, and would do so 
even at very low rates of interest. Both of these 
classes of investors do not require large premiums in 
order to induce them to convert part of their present 
incomes into capital. In the third place, we have mar- 
ginal investors, who will furnish more or less capital 
according to the inducements offered for its investment. 
These may be wealthy persons, or may be people of 
moderate means, who would save and invest a portion 
of their incomes even at low rates of interest. But 
they will save more, and furnish more capital, if the 
premium offered for investments is high. 



428 PRINCIPLES OF ECONOMICS. 

The demand for productive capital comes from all 

the industries that are needed to meet the wants of 

the society. The demand will be laroje in 
The demand . "^ ^ 

for productive proportion to the energy and enterprise of 
^^^^ ' the population in all branches of economic 

activity. In the second place, the demand will be stim- 
ulated by the natural opportunities offered for favorable 
investments. Both of these causes have made the de- 
mand for capital very active in the United States. 

The rate of interest is really the rate of annual 
income that will equalize future income with present 
Therateof in the minds of those persons who furnish 
^ro?ucti°e ^^^® marginal portion of the supply of capital 
capital. needed to meet the demands of the business 

of a society. In other words, we have merely another 
case of the equalization of the supply and the demand 
through changes in price, — in this case '^ price" meaning 
the premium offered for future goods or income. Prices 
of commodities must be high enough to enable the mar- 
ginal investors of capital to secure a premium, a rate of 
interest, that will induce them to furnish the amount of 
capital required. 

The demand for capital comes from business men, the 
TheequaUza- managers of industrial enterprises. They 
and demand"^ usually invest considerable capital of their 
accomplished own, and desire to invest more when the 

in the loan 

market. prices of their products are such as to make 

it profitable to put more capital into their businesses. 
Therefore they desire to secure loans from persons who 
have surplus incomes to invest, but who do not desire 



INTEREST. 429 

to enter into active business life. In an advanced stage 
of economic development, a large number of investors, 
having no active part in business, and a large number 
of active managers of enterprises, form the market for 
loans. 

1. The demand for loans varies. Business men de- 
sire to borrow when they calculate that they can secure 
from additional investments of capital enough to pay 
the required rate of interest, and to leave some profit 
besides. When business is active, and the probable 
profits of business are high, more business managers 
will desire to borrow. On the other hand, a higher rate 
of interest tends to discourage borrowing. 

2. The supply of loans comes partly from persons or 
institutions that are unwilling to engage in active busi- 
ness, or incapacitated from doing so. Retired business 
men, managers of trust funds, banking houses, univer- 
sities, and similar institutions belong to this class of 
investors. The supply of capital furnished from such 
sources does not vary quickly as the rate of interest on 
loans increases or decreases. In the second place, loan- 
able capital is furnished by people who might engage in 
active business if the rate of interest should become so 
low as to leave large profits to active managers of indus- 
trial enterprises. The supply of capital secured from 
such persons varies rapidly as the rate of interest 
changeo. The combined supplies of loanable capital 
secured from these two sources show, on the whole, a 
tendency to vary directly as the rate of interest secured 
from loans. 



430 PRINCIPLES OF ECONOMICS. 

3. The cgnipetition of borrowers and lenders in the 
loan market is the efficient force that determines the 
current rate of interest. Capital owned and invested 
by active business managers does not come into the loan 
market, but it exercises an influence upon the competi- 
tion for loans that takes place there. If managers have 
a large amount of capital of their own, the demand for 
loans is less ; while a smaller amount in the ownership 
of managers increases their demands in the loan market. 
Thus the rate of interest that equalizes future income 
with present is determined primarily in the market 
for loans. 

When loans of productive capital become common, 

and a market rate of interest is established, then all 

Interest may capital invested in productive enterprises is 

^! ^^^^^^a\ considered to be earnino^ interest, whether 

on aU produc- ^ ' 

tive capital, such capital is owned by the manager of 
the business or is borrowed from other persons. Thus 
an employer who has 120,000 of his own capital invested 
in his business may not estimate that lie has made any 
net profits until he has charged fl,200 of his income 
to the account of interest on his capital at the market 
rate, say six per cent. 

So far, we have assumed that the risk attending the 
Risk as a investment of capital is the same in all 
^12!L^"4„„ cases. But this is far from true. Of course, 

determining ' 

interest. a certain element of risk attends nearly all 
exchanges of present for future incomes. A business 
manager may lose all the capital that he invests, and 
may lose that which he borrows. Again, borrowers 



INTEREST. 431 

may prove dishonest, and may defraud the lenders, 
sometimes in spite of legal restrictions. But these 
risks are not the same in all investments, and there- 
fore the rate of interest varies. Manifestly a larger 
premium is necessary to equalize future income with 
present when there is a risk that the promised future 
income may never be secured. An unusually high rate 
of interest regularly points to an unusual risk. 

In progressive countries the rate of interest tends to 
decline. For this the following reasons may be assigned : 
In such countries an increasing number of Tendency of 
people possess capital, and are unwilling or !^!^**!? 
unable to engage in active business. The decUne. 
supply of loanable capital is greatly increased, and the 
interest rate that equalizes demand and supply is low- 
ered. In the second place, business becomes less specu- 
lative as a country develops, and the risk attending 
investments is lessened. Finally, in such countries the 
laws do more to facilitate the prompt payment or collec- 
tion of debts, thereby further diminishing risks and 
tending to lower the rate of interest. 

§ 264, The case of loans of durable consumers' goods 

requires little special explanation. A person interest on 

who invests 15,000 in a house that he rents ^"'■^^^^ , 
^ consumers' 

to another person for a year is exchanging goods. 

a present income of f5,000 for a future sum of f5,000,^ 

1 This assumes that allowance is made for repairs and for the depre- 
ciation in the value of the house. The so-called "rent," of a dwelling 
house includes repairs and depreciation, so that the owner of the prop- 
erty may receive back the original value of the house with interest at the 
current rate. 



432 PRINCIPLES OF ECONOMICS. 

plus an annual interest of $300. He exchanges $5,000 
of present goods for $5,300 of goods available a year 
hence. The rate of interest on such loans is deter- 
mined by the laws of demand and supply. 

§ 265. Short-time loans command interest for the same 

reasons as loans of productive capital for a longer period. 

But the rate of interest is generally higher 

interest on on sliort-time loans. This is because capital 

short-time |gjj^ f^p short periods of one, two, or three 
loans. ^ 

months must be continually re-invested, and 

may lie idle for a part of the time. The rate of interest 

on short-time loans fluctuates with changes in the money 

market. If money becomes " tight," banks find that 

their reserves diminish, and they are obliged to contract 

their loans and discounts. This can be done by raising 

the interest on short-time loans. When the stringency 

is over, the banks find that their reserves increase, and 

they extend their discounts in order to utilize their 

resources as far as possible. Discounts can be increased 

by offering them at lower rates of interest. The margin 

of fluctuation is very great in the case of these short 

loans. On October 29, 1896, the rate of interest on call 

loans in New York was ten per cent at the opening of 

the day's business. By noon it had risen to fifty per 

cent annual interest, and before night rose to eighty and 

one hundred per cent. On the other hand, money on 

call may occasionally be in little demand at one or two 

per cent. 

§ 266. For some purposes it is useful to speak of a 

general loan market, in which loans of productive cap- 



INTEREST. 433 

ital for permanent investments or for short periods of 

time, and loans of durable consumers' goods jj^g jo^^ 

are offered and demanded. Unquestion- market. 

ably there is a connection between the three. If the 

normal rate of return on one kind of loans exceeds the 

return on others, the supply of capital offered for that 

purpose will increase, and the rate will fall to the general 

level. This may be a gradual process, however. If the 

rates secured by banks on their short-time loans are 

unusually high, the profits of bankers will be larger, and 

more capital will flow into the banking business sooner 

or later.^ 

§ 267. It is an old fallacy that an increase in the 

supply of money lowers the interest on permanent 

investments, while a decreased supply of The rate of 

money raises the rate. This may be true i^t^^^ston 

temporarily of short-time loans, but is false investment& 

, T 1 , , . , is not affected 

when apphed to more permanent invest- ty the supply 

merits. The demand for loans means a °*™°"®y- 
demand for various other forms of productive capital, 
not a demand for money. So, too, the supply of loans is 
a supply of loanable capital, not a supply of money. If 
the amount of money is increased and prices are raised, 
there will be an increase in the money value of the sup- 
ply of capital goods, hut the money expisession of the 

1 In the general loan market two other kinds of loans might he men- 
tioned. First, a few people, either from imprudence or from misfortune, 
horrow funds to relieve personal necessities. But such loans are insigni- 
ficant in amount when compared with the general mass of loans. Second, 
governments borrow large amounts for public purposes. The demand of 
a government for loans in war times may greatly raise rates of interest. 
-28 



434 PRINCIPLES OF ECONOMICS. 

demand for capital will be increased also ; and the con- 
ditions of demand and supply will be unaltered. If it 
costs twice as much to establish productive enterprises 
when the prices of products are doubled, then the money 
value of the capital needed to build a factory will in- 
crease, and the money demand for capital will increase 
proportionately to the increased supply of money. 

§ 268. From antiquity until comparatively modern 
times the justice of interest-taking was attacked by phi- 
losophers, statesmen, and theoloarians. Dur- 

The justif ica- r ' ' o 

tion of interest- ing the Middle Ages both the Eoman Church 
^"^* and the civil authorities of Europe prohibited 

tlie practice. This opposition to interest, for the most 
part, rested upon the assumptions that a loan was a loan 
of money, and that money was sterile and unable to pro- 
duce more money. For this reason interest-taking was 
viewed as robbery. In modern times, however, it has 
been seen that most loans are loans of productive cap- 
ital, and that producers need a large supply of loanable 
capital. Three centuries ago, the growing need of the 
business world for capital broke down the mediaeval 
prohibition of interest. It is the present social impor- 
tance of a large supply of capital that has led modern 
peoples to justify interest-taking. 

At the present time usury laws are quite common. 
Most of our states attempt to fix a maximum rate of 
interest. Such laws declare the exaction of more than 
a certain rate of interest to be usury ; they 
make such contracts void at law ; and some- 
times inflict penalties for charging usurious interest. It 



RENT. 435 

has been found that the commercial world manages to 
evade these usury laws in one way or another, so that 
they are practically inoperative in the general loan mar- 
ket. When applied to commercial transactions these laws 
are beyond question unwise. On the other hand, our usury 
laws have helped poor people who sometimes borrow to 
meet personal necessities to keep out of the hands of 
money sharks, who make a practice of victimizing such 
ignorant or helpless borrowers. It would be wise to 
remove such restrictions from the loan market, and to 
leave the rate of interest to be determined by the forces 
of supply and demand in the commercial world. A high 
rate of interest tends to remedy itself by attracting an 
increased supply of capital. On the other hand, the 
interests of the poor who may have to borrow to re- 
lieve their personal necessities may be safeguarded by 
leaving to 'the courts the work of deciding when interest 
contracts are usurious, and ought not to be enforced. 

VI. Rent. 

§ 269. Rent, in the economic use of the word, is the 
return that is secured by the owner of any natural agent. 
The most common case is the rent secured The nature 
from land, but the rent of water privileges, of I'ent. 
dock facilities, etc., is an income of the same sort. 
Natural agents are reduced to private ownership when 
they become scarce relatively to the demand for them. 
Land became private property only when nomadic peo- 
ples settled down to agricultural life, and arable land 
became scarce. 



436 PRINCIPLES OF ECONOMICS. 

§ 270. Natural agents are used in production and 

serve to satisfy human wants. Thus far they resemble 

, ^ capital. But they differ from capital in that 
The value of r j r 

natural they are not produced, and their supply is 

fixed by nature. They become economic 
goods only when the demand for them increases so as 
to make them scarce, instead of free goods. What 
determines the value of natural agents that become rela- 
tively scarce ? Manifestly their value depends upon 
their scarcity, and is not affected by expenses of pro- 
duction. The owner of a scarce natural agent, such as 
a piece of land, can secure from it an annual income, or 
rent, say of |600. Tlien, if the market rate of interest 
on capital happens to be six per cent, the value of the 
piece of land will be such a principal sum as will yield 
$600 annually with interest at the current rate. In this 
case the land would be worth $10,000. Now it is neces- 
sary to explain the causes that determine the annual 
income or rent obtainable from land. 

But first it is necessary to explain that improvements 

upon land or upon any natural agent are capital, and 

ments ^^^^ ^ value proportioned to their marginal 

upon land or expenses of production. Land is in itself a 

natural agents natural agent, but fences, ditches, dikes, 

are capital. myalls, and fertilizers are capital ; and are 

valued according to the expenses of producing them. 

A water power is a natural agent, but a dam and a 

canal constructed for the purpose of utilizing the power 

are capital. A piece of land or a water power, upon 

which no labor and capital have ever been expended, 



RENT. 437 

may be leased or sold at prices that depend solely upon 

scarcity. 

§ 271. The income received from natural agents may 

be explained by considering its most common form, the 

rent of land. Such rent arises out of dif- _ , 

The income 

ferences in the desirability of various tracts from natural 
of land, due to differences in location or in 
natural fertility. For agricultural purposes the natural 
fertility of land is important. Nature does much more 
to make some lands fertile than it does for others. 
Temperature and rainfall favor some lands. Some 
soils are far stronger than others, and can be used 
continually without deteriorating in the same degree. 
A plain has certain advantages over the slopes of a 
mountain, and land with a southern exposure is superior 
to land that slopes to the north. When land is once 
brought into cultivation, then the condition of the soil 
depends also upon the methods employed to preserve its 
fertility ; but natural differences still remain very im- 
portanto The location of a tract of land is important 
in determining its desirability for any purpose whatever. 
Agricultural land must be accessible to the market, and 
the rent secured from it will depend partly upon this 
consideration. Land used for residence purposes will 
be more or less desirable according to its accessibility, 
its healthfulness, and the beauty of its surroundings. 
Land used for the location of manufacturing or com- 
mercial enterprises must, above all, be accessible to the 
market, to means of transportation, and to the labor 
supply. 



438 PRINCIPLES OF ECONOMICS. 

§ 272. The causes that determine rent can be illus- 
trated well by studying the rent from agricultural lands. 
In new countries land is sometimes super- 

The rent of ^ 

agricultural abundant. The settlers occupy first those 
sites which offer the best immediate advan- 
tages either for defense or for securing a quick return 
from the soil. Produce is raised from the land with 
little expenditure of capital and labor. Suppose that 
the average investment on each acre of wheat land is 
five dollars/ and that the average return per acre is 
fifteen bushels of wheat. Now suppose that population 
grows and that the demand for wheat increases so that 
the price rises. How will this increased demand be 
met ? Wheat-raisers can either invest more capital on 
the land already cultivated, and secure a larger aggre- 
gate but a smaller proportional return ; or they can 
apply the additional labor and capital to new lands, 
which may not be as fertile as the old, but may give as 
large returns as could be secured by additional invest- 
ments on the land formerly cultivated. Suppose that, 
by investing five dollars more on the old lands, the yield 
could be increased to twenty-five bushels, while the new 
investments on the poorer lands would have yielded ten 
bushels. Then producers would with equal profit invest 
the additional five dollars on old land or on new but 
poorer land. If, however, the additional investment 
would have increased the yield of the old lands to 

1 We will suppose that this covers not only all expenses for labor and 
materials, but also the expenses for interest on capital, so that it will leave 
the producer both interest on his capital and fair wages for his work- 



RENT. 439 

only twenty-four bushels, then producers would have 
preferred to take the poorer lands into cultivation. 

Now, as soon as the demand for wheat had increased 
so that the investment of five dollars per acre on the 
most available lands could not satisfy it, Diminishing y 
prices would rise. This would continue until crease the' I 
prices became hiorh enough to make it prof- ^^arginai 

^ ° '-^- ^ expenses of 

itable to invest more labor and capital, say production, 
five dollars more per acre, either upon the old lands, sub- 
ject to a diminishing return, or upon new and poorer 
lands. The increased supply would be produced at an 
increased marginal expense, and prices must rise high 
enough to cover this expense, if the demand is to be 
satisfied. The former expense of raising wheat was 
five dollars for fifteen bushels, or thirty-three cents per 
bushel. The increased supply of ten bushels per acre 
required an increased outlay of five dollars, whether 
raised on old lands by more intensive cultivation or on 
new lands. The marginal expense of raising wheat has 
risen therefore to fifty cents per bushel, and prices must 
rise to that point before the supply will be increased. 

When increasing demand forces up the price of wheat 
and enables an increased supply to be furnished at a 
greater marginal expense, rent will appear. In the case 
just assumed, the producer of wheat on the older and 
better land can now invest five dollars per acre, pro- 
duce fifteen bushels worth fifty cents per bushel, and 
can secure a surplus of two dollars and a half. Or he 
can invest ten dollars per acre, produce twenty-five 
bushels worth fifty cents a bushel, and can secure a sur- 



440 PRINCIPLES Gi ECONOMICS. 

plus of two dollars and a half. On the other hand, 
before the mcreasing demand raised the price of wheat 
Rentisasur- from thirty-three to fifty cents, such a wheat 
Ji^'morr^^* raiser invested five dollars per acre, pro- 
productive duced fifteen bushels worth only five dol- 

investments 

of capital lars, and secured only enough to cover his 
and labor. expenses. But the rise in the price of wheat 
may have led some producers to resort to poorer lands, 
investing five dollars per acre and securing ten bushels 
of wheat worth five dollars. Such producers receive no 
surplus, and could pay no rent for their lands. Now, 
the owners of the better lands can secure the surplus of 
two dollars and a half that is received from those lands 
as soon as wheat rises to fifty cents per bushel. This 
surplus is economic rent. 

In the case just assumed, the second investment of 
five dollars per acre, either upon the old and better 
Economic ^^^^ ^r upoii the iiew and poorer, yielded 
diS^^^^tiai ^^ surplus of income over expense. A rent 
return secured ^as secured from the more productive 
moreproduc- investments of labor and capital which 
mentTupon yielded a surplus. Rents are measured 
land. always in this way, and are a differential 

return secured from investments that are more produc- 
tive than the marginal investments that receive only 
enough to just pay for making them. These marginal 
investments may be made on new and poorer land, in 
which case rent is measured by the superiority of the 
better land over the poorer. On the other hand, the 
marginal investments may be made on the older lands 



I 



RENT. 441 

because they will secure there a larger return than 
could be gamed from poorer lands. In the first case 
economists speak of an extensive margin of cultivation, 
that is, an investment on the marginal lands from which 
producers secure just enough to cover their expenses. 
In the second case, there is an intensive margin of cul- 
tivation, that is, a more complete but more expensive 
utilization of old lands, which is made possible by 
increased prices. 

In a new country settlers are seldom able to cultivate 
the richest soils first. They select those that promise 
the largest immediate return. As time xhe opening 
goes on, richer soils may be utilized. The upofnew 

° "^ lands may 

result is to increase the supply of produce, throw less 
to lower prices, and to throw out of cultiva- ^^^of 
tion the poorest lands that formerly were in cultivation, 
use. The demand may be satisfied, under such circum- 
stances, by a less intensive investment of labor and 
capital upon better soils, and by a less extensive invest- 
ment upon poorer soils. Such a change in methods of 
production will decrease the difference between the 
marginal investments and the more productive invest- 
ments of labor and capital. This will lower the surplus, 
or rent, secured on the superior investments. 

§ 273. Land utilized in manufacturing or commercial 
enterprises is valued according to its location, both in 
respect to the market and to the labor supply.^ In- 

^ Of course location is an important element in determining the desira- 
bility of agricultural land. Proximity to the market, or to railroads and 
canals, decreases the cost of placing wheat in the market. 



442 PRINCIPLES OF ECONOMICS. 

creasing demand for products will raise prices so that 

producers will push their marginal investments on to 

^^ovQ distant and less desirable lands, or will 

The rent of ^ ' 

land used for invest more intensively upon land already 
occupied. Sometimes there may be no act- 
ual increase of price, but rather a failure of prices to 
fall as fast as they might otherwise. The principles 
governing the rents of such lands are the same as those 
that determine agricultural rents. 

§ 274. Rents do not raise prices, but are caused by 
high prices. The prices of freely produced commodi- 
ties tend to approximate the marginal ex- 
cause of high penses of production. Now, in the cases 
assumed, rent did not appear until increas- 
ing demand had raised the price of wheat and made it 
possible to invest five dollars additional, for which an 
additional return of only ten bushels was secured either 
upon the old lands or upon the new and poorer lands. 
Therefore the rent of two dollars and a half per acre 
was a surplus caused by the rise of prices, and not a 
cause of high prices. If the landlord should have 
charged no rent, prices would not have fallen below the 
marginal expenses of producing the increased supply ; 
and the profits of the farmers on the better lands would 
have been increased without any possibility of a change 
of prices. The enormous rents paid for land in the 
business center of a large city are due to the exceptional 
facilities offered by such tracts for doing a large busi- 
ness, by investing large amounts of capital that secure 
surplus profits before the marginal investment is made, 



RENT, 443 

say the last story of the building, at which point the 
returns received only just pay for the expense of mak- 
ing the outlay. Demand for products and services 
forces prices up so that the supply can be increased by 
more intensive investment on city lands, or more exten- 
sive investment in the suburbs. Economic rent is a 
result of this more intensive or more extensive invest- 
ment, and not a cause of higher prices. 

Of course this applies solely to economic rent, not to 
the so-called rent of buildings and improvements, which 
is really interest on capital. Sometimes it ,. .^ ^. 

•' ^ Limitations 

is said that " rent does not enter into prices." upon tMs 
Such a statement means merely that rent is ^""^^^ ®' 
not a cause of higher prices. Manifestly, part of the 
price secured from more productive investments goes to 
pay rents. The statement that rent is an effect, not a 
cause, of high prices needs one important qualification. 
Land will normally be rented for such purposes as will 
enable the tenant to pay the highest rental possible. It 
may happen that lands otherwise available for use in 
one branch of business may yield a higher rent when 
used for some other purpose. When this happens, the 
supply of the product of the first industry can be in- 
creased only by applying capital more intensively upon 
lands formerly used or by resorting to newer and poorer 
lands. Under such circumstances the marginal ex- 
penses of producing that product would be greater than 
they would have been if it had been practicable to invest 
capital upon the land that yielded a higher rent when 
utilized in some other industry. Of course this meana 



444 PRINCIPLES OF ECONOMICS, 

that prices must rise higher than would have been neces- 
sary otherwise before the supply can be increased. 
These higher prices will be the result of the impossi- 
bility of utilizing the land rented for other purposes. 
In the rents of desirable city lots this is a very impor- 
tant consideration. Probably no land available for 
wholesale business, for instance, would fail to bear some 
rent when used for other purposes. And this necessi- 
tates more intensive investment of capital upon the 
land actually utilized by wholesale dealers, in order to 
supply a given demand.^ 

§ 275. Moreover, actual rents differ sometimes from 

true economic rents. This economic law of rent pre- 

Actuairent Supposes competition. It assumes that aland- 

frequently dif- lord Will ei'ect a tenant the moment that he 

f ers from the 

true economic finds another who can pay more rent, and 
that tenants will give up their locations the 
moment the rent rises above the true economic rent. 
These conditions are only partially fulfilled, as compe- 
tition is often imperfect. Landlords often do not exact 
full competitive rents from old tenants. Farmers who 
cultivate land for subsistence may be forced to pay 
more than full economic rents, since they may be more 
likely to accept the heavier burden than to look around 
for other land. On the other hand, competition is much 
more active among business men, and tends to make 
actual rentals approximate the true economic rents 
throughout the commercial world. 

§ 276. It has been claimed that the tendency of eco- 

1 See Marshall, Principles of Economics, 478-485. 



RENT. 445 

nomic progress is to cause a decided increase in rents. 
In agriculture, it is said, the law of diminishing returns 
drives producers constantly to cultivate iheaUeged 
poorer lands. This increases the differential *g^^J°to^ °* 
rents secured from better lands. In the increase, 
case of town lots, it is urged that every increase of 
population raises rentals in a marked manner. All such 
increases of rents, it is thought, are due solely to the 
growth of society, not to the activity of the particular 
landowners whose rentals are raised. Hence the ex- 
pression " the unearned increment " has been applied to 
this growth of rent produced by social development. 

Those who speak of the unearned increment com- 
monly overlook the losses that many landowners suffer. 
Large sums spent in developing city real Losses of land- 
estate have been entirely lost, as the enter- ^^^yoygr- 
prises have often proved failures. Changes looked, 
in the location of street railways or in the movement of 
fashion or business from one section to another, lower 
rents in some sections of a city nearly as much as they 
increase them in another. The development of facilities 
for rapid transit tends to decrease the demand for city 
lots for residence purposes. In the case of agricultural 
lands, rents have been lowered repeatedly over large 
sections of country. In England, agricultural rents 
have been lowered greatly by the competition of cheaper 
wheat, beef, and pork produced in the United States. 
In the eastern portion of this country agricultural rents 
have been lowered by the opening up of the wheat lands 
of the West. Many farms in New England cannot be 



416 PRINCIPLES OF ECONOMICS. 

rented for enough to pay interest on buildings and im- 
provements on the land. If we set off these decreases 
against the increases of rent that have been caused by 
social development, the net unearned increment received 
by landowners, as a class, is very much smaller than is 
usually represented. 

Only in the case of landowners who own particularly 

desirable tracts of land can it be claimed that there is a 

Yet the un- gi^^at unearned increment. Some favored 

earned incre- situations in the business centers of cities, 

ment is very 

large in indi- some sites available for docks, for terminal 
facilities for railroads, etc., have become 
enormously valuable, so that a large unearned increment 
has been received.^ 

VII. Wages. 

§ 277. Primarily, wages are the reward received by 
hired laborers. The term is extended sometimes to in- 
Definitionof clude the independent incomes received by 
wages. workers who carry on any sort of produc- 

tive activity upon their own account ; but for the 
present we shall investigate the laws that determine 
the reward, the dependent income, secured by hired 
laborers. 
Nominal wages are the amounts of money received 
Real and nom- ^7 laborers during any specified time. Real 
inai wages, wages are the "necessaries, comforts, and 
luxuries" that the laborer is able to command as 

1 In the case of city lots the increment of land values is partly offset 
by assessments for a large part of the expense for improvements, such 
as sewers, street paving, etc., that benefit the property directly. 



WAGES. 447 

remuneration for his labor. If one laborer receives 
higher nominal or money wages than another, but is 
obliged to pay more for most of the commodities that he 
is accustomed to buy, then his real wages may be no 
higher. Furthermore, two laborers may receive the 
same money wages, but one may receive house rent or 
board free, or may be given various privileges, that enable 
him to make his money go further in supplying his 
wants. In such a case, the real wages of the two men 
would not be the same. 

§ 278. Persons who work for hire sometimes receive 
returns that are called salaries, not wages. It is impor- 
tant to distinguish between the two forms wages and 
of income. The first difference is that a salaries, 
salary continues as long as the person receiving it is in 
the employ of the entrepreneur who pays it. On the 
other hand, wages generally stop the moment work is 
interrupted. Second, salaried employees are usually 
engaged for more definite terms that sometimes are of 
long duration ; while the wage earner has a less secure 
tenure of his position. Third, persons who receive sal- 
aries generally stand in closer personal relations with 
their employers, and are more likely to occupy equal 
social positions. 

§ 279. Time wages are wages paid according to the 

j time that a laborer works. Piece wages are paid accord- 

' ing to the quantity of work that is done. _ 

° ^ •' Time wages 

Men employed on time wages have less and piece 
direct interest in making their product as "^ ^ ®* 
\ large as possible ; so that piece workers often do more 



448 PRINCIPLES OF ECONOMICS. 

work in a given length of time, and may earn more 
money each day. 

But it usually holds true that men producing the same 

commodity receive about the same wages for each unit 

of product, whether paid by the day and 

But labor-cost it,. 

tends to be the week or by the piece. In other words, the 
bothmeuiods la,bor-cost of each unit of a commodity tends 
ofremunera- to be nearly the same. Competition among 
employers can produce no other result. An 
employer who produces at a much higher rate for 
the labor expended upon each unit of product, will be 
likely to be driven out of business unless he possesses 
some advantage that compensates for this greater labor- 
cost. Finally, the student needs to be reminded that 
there is no necessary connection between high rates of 
daily or weekly wages and a high labor-cost for each unit 
of output, or between low earnings and low labor-cost. 
Efficiency of the labor as well as the daily or weekly 
wages must be considered in determining whether the 
labor-cost is high or low.^ In general it may be said 
that ^laborers receiving higher time wages are more 
efficient than those whose wages are low. But this 
greater efficiency is not always proportioned to the dif- 
ference in the rates of wages. Sometimes it has been 
shown to be less, at other times more, than this difference*^ 
§ 280. The person who does not possess the capital 
necessary to enable him to undertake production on his 

1 On the subject of efficiency, see § 77. See Hobson, Evolution of 
Modern Capitalism, 261-284 ; Brasset, Work and Wages ; Walker, The 
Wages Question ; Schoenhof, The Economy of High Wages. 



WAGES. 449 

own account must become a hired laborer by selling his 

services to some employer. The wages contract is made 

before work is undertaken, and waares must ^ 

' ° General con- 

be determined some time in advance of the siderations 

sale of the product. Moreover, the em- wages of the 
ployer is obliged by law to pay the stipu- ^^^ed laborer, 
lated wages whether the product prove salable or 
unsalable. Evidently he has to estimate carefully the 
probable future value of the goods produced. There- 
fore wages have been called " the discounted product of 
industry," and defined as " what capitalists are ready to 
advance on the expectation of a future return." When- 
ever the process of production is so long that weeks or 
months elapse before the product is completed and 
marketed, then laborers receive weekly or monthly wages 
a considerable time before any money return is received 
from their work. Under such circumstances, employers 
cannot undertake enterprises unless they have at their 
disposal sufficient funds to enable them to advance 
weekly or monthly wages, during the time that must 
elapse before any return is secured from the sale of the 
product. 

§ 281. The question of wages must be studied in two 
aspects : First^ we must investigate the forces that 
determine whether the entire laboring class General and 
of a country or a section secures a larger or relative wages, 
a smaller quantity of real wages, of the " necessaries, 
comforts, and luxuries of life." Why is it, for instance, 
that the wages received by the entire class of wage- 
earners have been greater in the United States than in 

29 



450 PRINCIPLES OF ECONOMICS. 

Europe ? This question is the problem of general wages. 
Secondly^ we may inquire into the causes that determine 
the various rates of wages that are paid to different 
individual laborers or groups of laborers within a country. 
On what grounds, for instance, can we explain the differ- 
ent wages paid to various classes of laborers within the 
United States ? This is the question of relative wages. 
General wages must be first considered. 

§ 282. General wages, or wages considered as the 
share of the social income received by the entire class of 

hired laborers, are a varyihai: share of a 
General ' -^ ® 

wages, or varying product. If the productivity of the 
22^0? tiie^ industry of a society is great, then the social 

class of Mred income will be large, and the quantity of 
laborers in _ ° ' ^ j 

the national commodities or services received by laborers 
^^^' may be large. In the second place, the 
share or portion of the social income received by the 
laboring class will be larger or smaller in proportion 
to the advantages or disadvantages under which the 
hired laborers make wage contracts with their employers. 
Wages may possibly increase somewhat at the expense 
of the share of the product that goes to employers, or 
they may increase as a result of increased productiv- 
ity without decreasing the shares of the employing 
classes. 

§ 283. General wages find an upper limit beyond 
which they cannot absorb a larger share of the social 
income. They cannot claim permanently so large a por- 
tion of the product that employers will be discouraged 
from undertaking or carrying on business enterprises. 






WAGES. 451 

If they should ever rise so high, the number of Indus 
tries would diminish, the general demand for labor 
would decrease, and wages would necessarily fall sooner 
or later. Neither can wa^es absorb per- 

° ^ TheUmitsto 

manently so much of the product that inter- tte increase 
est cannot be paid to capitalists. If this °^^^^®^* 
should happen, the supply of capital would diminish and 
the demand for labor would gradually fall off. Moreover, 
wages cannot absorb the share of the product that goes 
to landowners in the form of rent. This share is 
received on account of differences in the advantages 
offered by various tracts of land, and cannot be absorbed 
by wages. 

Assuming that contracts between employers and labor- 
ers have determined the gross money wages 

(hence the general wages) of the wage- wages limited 
T f. ,, . r . ' somewhat by 

earning classes or the country tor a certain past Indus- 
period, then we may notice a further limi- *^' 
tation to general wages. Laborers may dispose of their 
money wages in four ways : — 

1. In the purchase of consumable commodities that 
have recently been completed. Thus from sixty to 
eighty per cent of a laborer's income is expended for 
food, clothes, fuel, light, and a few luxuries. 

2. In the purchase or hire of consumable commodities 
that may have been completed many years previous. 
Thus laborers spend from twelve to fifteen per cent of 
their income for house rent. Some buy the houses in 
which they live. 

3. In the purchase of personal services. This is a 



452 PRINCIPLES OF ECONOMICS. 

small item in the expenditure of the majority of hired 
laborers. 

4. Finally, part of the income may be saved. This 
means that it is invested in capital either directly or 
indirectly. In this country the deposits in the savings 
banks in 1905 amounted to $3,261,000,000, the larger 
part of which belonged to wage-earners. 

In so far as the laborers spend their wages for consum- 
able commodities, — and such expenditures form sixty 
or eighty per cent of the total, — they are 

This is be- 
cause Indus- dependent upon the supplies of consumable 

tosom^S-^* goods now in the markets. But these con- 
tent by sumable goods in the market are the prod- 

capital. 

uct of capital and labor invested in the past, 

and are only slightly increased out of the product of the 
week or month for which the laborer is paid. There- 
fore, the amount of consumable commodities that 
laborers can buy with their money wages depends chiefly 
upon past, not upon current industry. Modern capital- 
istic production requires time, and the goods in the 
market this week or this month are largely the products 
of the industry of past months or even years. If 
laborers expend their incomes for house rent or for 
houses or for capital goods, they may draw to a very 
large extent upon the products of industry for two or 
three decades past. But money wages expended for 
such goods as food, clothing, fuel, etc., can command 
merely the products of the last few months or the last 
year or so. Therefore, the quantity of such goods 
secured by the entire laboring class of a country cannot 



WAGES. 453 

be increased beyond the limits set by the productivity of 
the industry of the immediate past. It is possible for 
them to increase gradually as the productivity of a 
country's industries increases. 

§ 284. Economists have recognized that the laborers' 
" standard of living " sets limits below which general 
wages cannot fall. The standard of living The limits 
of the wage-earning classes is the quantity geneTaTwa^es 
of the necessaries, comforts, and luxuries of cannot fail, 
life that laborers are accustomed to enjoy. We have 
already seen that this is a force that limits the growth 
of population, hence the supply of labor ( § 78). A 
sudden increase of the labor supply makes the conditions 
unfavorable for the hired laborers when they make their 
wages contracts, while a decrease in the supply will 
make the conditions more advantageous. Changes in 
the supply of labor tend to adjust general wages to the 
standard of living. 

But the laborers' standard of living cannot influence 
general wages permanently except as it affects the sup- 
ply of labor. Now tlie supply of labor But the sup- 
changes slowly, and a whole generation may cL^ges^^^ 
be needed to effect a considerable change, siowiy. 
unless emigration or immigration take place. Leaving 
these last forces out of consideration for the moment, it 
is apparent that if wages fall below the present standard 
of living, the supply of labor will not decrease quickly. 
Therefore the standard may be lowered temporarily. 
Wlien this occurs, there is danger that the rising genera- 
tion of laborers may be brought up on a lower plane of 



454 PRINCIPLES OF ECONOMICS. 

comfort ; and, becoming accustomed to it, may not limit 

their numbers. Then the standard may be lowered 

permanentl}^ 

If laborers are able to migrate to other places where 

wages are higher, then it is easier to maintain the 
The influence standard of living. If wages fall below 
of emigration ^^iq accustomed standard, emisj:ration will 

andimmigra- ^ ° 

tion. decrease the supply of labor more quickly 

and will make it easier to restore wages to the former 
level. On the other hand, if immigration brings into 
the country a supply of laborers having a lower stand- 
ard of living, then it will be harder to maintain the 
existing standard. In the United States it has often 
proved true that immigrants have desired to improve 
their standard of living, and have not tended so much 
to depress the standard of American laborers. But 
of manv of the immigrants that have crowded into our 
large cities this has not proved true. 

Whenever there is an abundance of free land, hired 
laborers find it easier to maintain a high standard of 
The effect of living. In this country it has been so easy 
free land. f^j. laborers to acquire fertile land and to 
engage in farming on their own account, that the 
supply of hired laborers has been reduced quickly and 
easily whenever wages have fallen below the income 
that could be secured from agriculture. In the 
future, American wages will be less affected by this 
influence. 

Some writers, especially the socialists at the present 
time, have assumed that the standard of living must 



WAGES. 455 

necessarily be low ; and that wages tend normally to 
fall to the very lowest point where the laborers can 
possibly keep themselves alive and main- Thestandardof 
tain the supply of labor. But this is en- ^o^s^LtiT^ 
tirely false ; for the standard of living has J^aised. 
steadily advanced during the past half-century, and 
may do so in the future. Its advance depends upon 
forces that are partly within the control of the la- 
borer. Public education, that broadens the outlook and 
the interests of the laborer, tends to make him demand 
broader opportunities, and to refuse to bring into the 
world children for whom he cannot provide a fair start 
in life. Moral elevation, and everything that tends 
to make him more of a man, elevates the standard of 
his living. The same causes enable the laborers to 
combine in order to secure by intelligent action all 
the wages that are their just dues. These facts are ap- 
preciated by the working classes as never before, and 
we may expect a continued rise of the standard of liv- 
ing. Finally, increased wages secured in this manner 
would not be gained at the expense of other classes in 
the community. Greater efficiency is a natural result 
of an improved standard of living, and such an advance 
in the condition of the laboring classes increases the 
social income out of which the higher wages must 
come. 

§ 285. We must now consider why the wages re- 
ceived by hired laborers differ in various Relative 
employments. Manifestly, laborers compete wages, 
with one another as far as possible for the most desir- 



456 PRINCIPLES OF ECONOMICS. 

able positions ; and it is necessary to explain why this 

competition does not produce the same rate of wages in 

all employments. 

Laborers in their rivalry with each other compete for 

those positions that offer the greatest net advantages. 

Other thino;s besides the nominal money in- 
Competition ° -^ 

among labor- come make the competition for any place 
toward occu- niore Or less intense. Besides the nominal 
pations off er- ^affes offered, laborers may consider the 

ing highest ^ ' '' 

"netadvan- question of the continuity or the certainty 
^^^^' of employment, preferring lower wages 

with constant employment. Also they may consider 
the chances for failure or success in their work. If 
success is doubtful, competition will be less intense. 
Furthermore, laborers may consider the agreeableness 
or disagreeableness of the employment, preferring 
agreeable work. Natural tastes and inclinations affect 
their decisions on these points. The varying social 
esteem in which different employments are held is an- 
other important consideration. Finally, the intensity 
and duration of the exertion, both physical and mental, 
affect laborers' judgments in such matters.^ Any em- 
ployment will appear more or less desirable according 
to the net advantages offered after all these considera- 
tions are taken into account. 

§ 286. It is easy to show that all laborers are not 
able to enter into competition for the same positions, 
even if all should estimate the net advantages in pre- 

1 Read Adam Smith's account of the causes of differences in relative 
wages, " Wealth of Nations," Bk. I. Chap. 10. 



WAGES. 457 

cisely the same manner. Hired employees are divided 
into non-competing groups, among which won-competing: 
competition is very imperfect or is altogether Slorer^™^"^ 
lacking. These groups are based upon at least five sets 
of causes : — 

1. Differences in intellectual ability. Some men are 
unfit for responsible positions, and unable to compete for 
positions requiring any high degree of intellectual ability. 

2. Differences in moral characteristics. In many 
positions of responsibility the fitness of the employee 
may depend largely upon his moral character. 

3. Differences in training and education, both general 
and special. General education may increase a man's 
fitness for many positions, while special training of a 
technical character must be possessed by all who desire 
to secure employment as skilled workmen. 

4. Differences in physical health, strength, and en- 
durance. 

5. Poverty and ignorance. These render laborers 
unable to learn where better opportunities for employ- 
ment may be found, and make it difficult or impossible 
for them to move to the place where more favorable 
openings might be secured. 

Among non-competing groups of laborers a certain 

competition may exist in the long run, because it may be 

possible for the children of one g-roup to fit 

... . Further 

themselves for positions in others. Then, if considera- 

any group enjoys special advantages, more °^' 
young persons will strive to enter that trade or pro- 
fession. Public education is of great importance in 



458 PRINCIPLES OF ECONOMICS. 

making possible this indirect competition among dif- 
ferent groups.^ Improved means of transportation and 
facilities for spreading intelligence tend to increase 
competition among those persons ah-eady located in 
particular industries. Yet, when all these allowances 
are made, there remain well-defined, non-competing 
groups. The lowest groups are the largest, and include 
almost all unskilled laborers, who are not protected 
from the competition of their fellows by the possession 
of special training or skill. Such laborers often have no 
choice whatever in their work, and must accept whatever 
comes to hand. Even in the most unhealthy and dis- 
agreeable occupations wages are often low because the 
workers have no alternative open to them. Above these, 
come groups of skilled workmen separated from each 
other by the difficulties of changing from one trade to 
another. Then come the lower grades of persons 
engaged in labor of a more intellectual character. 
Finally, there are small groups of responsible brain- 
workers, possessing unusual abilities and enjoying 
exceptional training. 

§ 287. We are now ready to explain differences in 

relative wages. The first thing to notice is that society 

The causes of m^st pay for a given supply of any commodity 

differences ^^ services a price high enough to cover the 

wages. marginal expenses of producing it. These 

marginal expenses include the cost for labor, so that we 

1 Trade unions sometimes try to restrict the number of apprentices that 
enter particular trades. In so doing they tend to obstruct this indirect 
competition among different groups. 



yVAGBS. 459 

may say that the price of any commodity or service 
must be high enough to enable employers to pay suffi- 
cient wages to secure the highest-priced laborers needed 
to produce the required supply. Then, leaving the 
employer out of consideration, we may conclude that 
the supply of any commodity or service will be so 
regulated that its price, or its marginal utility to 
society, will balance the expense of securing the most 
expensive, or marginal, portion of the labor needed to 
produce the supply. Relative wages, therefore, are de- 
termined by a balancing of the forces of demand and 
supply. 

In the chapter on value, it has been shown that 
demand depends upon the marginal utility of the com- 
modity or service to society. It remains to Forces that 
explain briefly the operation of the forces demandaiid 
that control the supply of labor available supply- 
for the production of any particular commodity or 
service. The supply available is determined by the 
difficulty of securing men of the ability, character, 
strength, and training required for the performance of 
the work necessary to the production of the goods in 
question. This difficulty will be greater or less according 
to the following circumstances : — 

1. The responsibilities imposed upon workers, and the 
intellectual and moral qualifications required. 

2. The extent of the training, education, and acquired 
skill that must be possessed by the worker. 

3. The intensity of the exertion, whether mental or 
physical. 



460 PRINCIPLES OF ECONOMICS. 

4. Agreeableness and healthfulness of the work ; also 
the social esteem in which the laborer is held. 

5. In this connection, the student must notice that the 
family is often the economic unit. When the wife or 
children are able to enter the trade, and thus increase 
the earnings of the family above the former level, the 
wages received by the father are likely to fall, because 
the expense of securing his services is less than it would 
be if he were obliged to support the family wholly out 
of his earnings. 

VIII. Profits. 

§ 288. Any person who possesses capital, or can 
induce other people to place capital in his control, may 
The position of enter almost any line of industry as an 
the entrepre- oro;anizer and independent manager of busi- 

neuror ^ 

undertaker, ness, and an employer of labor. The em- 
ployer's, or entrepreneur's^ chances for making a profit 
from his investment of capital depend upon his ability 
to produce and sell products for more than he expends 
in placing them in the market. The expectation of mak- 
ing such a profit induces men to undertake the cares 
and responsibilities of business management. 

The investment of labor and capital in any line of 
production is attended by more or less risk. It is 
The risks of possible that the product of the enterprise 
investment, t^^lj not be in sufficient demand to make 
the investment remunerative. It is possible that other 
producers may be able to supply the demand more 
cheaply. In case a business enterprise fails to find a 



PROFITS. 461 

remunerative demand for its product, or is unable to 
make a profit by selling at prices as low as those offered 
by competitors, then the labor and capital invested in it 
have been misapplied. Every such failure causes a social 
loss, and it is important to avoid unnecessary wastes of 
this character. The law throws upon the employer, or 
eMtrepreneur^ the primary responsibility for such losses. 
People are allowed to establish enterprises only upon 
condition that they assume tbe risk of failure. Entre- 
preneurs must satisfy all obligations that they incur 
before they can secure any profits from their invest- 
ments. In case of loss, the entrepreneur must meet his 
obligations by drawing upon his capital. By throwing 
upon employers the risks of business management, so- 
ciety constantly eliminates inefficient managers and 
places the control of its productive forces in the hands 
of those organizers who prove themselves most efficient. 
Society can afford to allow successful managers to make 
large profits, if, by so doing, it is guaranteed the most 
effective control and direction possible under present 
conditions. 

§ 289. The profits received by employers may be di- 
vided into two classes, namely, necessary and differential 

profits. Necessary profits are the minimum 

Necessary and 
returns that society must pay to all the differential 

employers needed to furnish the requisite ^^°^®* 
supply of any comm_odity. If fifty employers are en- 
gaged in furnishing the needed supply at a certain 
price, we know that the price will be high enough to 
cover the expenses of producing the most expensive 



462 PRINCIPLES OF ECONOMICS, 

or marginal portion of the supply. Any employers who 
try to enter the business, but are unable to sell at this 
price, will have to fail and give up their attempts to 
compete. But the marginal producers, who furnish the 
most expensive portion of the supply, just manage to get 
a fair return on their investments. Prices must be high 
enough to allow marginal employers to secure a neces- 
sary or minimum profit. Other employers who produce 
goods at less than this marginal expense will secure, not 
only necessary profits, but also a further differential 
profit that depends upon the differences in their costs 
of production. 

§ 290. The necessary profits received by all em- 
ployers, even the marginal ones, are composed of two 
Necessary elements. First, they include interest on 
profits. invested capital, computed at the current 

market rates. If employers could not secure interest 
on their capital sufficient to cover the difference between 
future and present income, investments would diminish; 
and prices of commodities would rise high enough to 
insure an adequate return to capital. The second ele- 
ment in necessary profits is the remuneration for the 
efforts and trouble that employers incur in the manage- 
ment of productive enterprises. Economists call this 
element " wages of superintendence," a term that empha- 
sizes the resemblance of this part of necessary profits to 
the wages of labor. The resemblance is marked because 
both forms of income are returns for personal exertion. 
Furthermore, both are governed by the same principle, 
namely, that the remuneration must be sufficient to cover 



PROFITS, 463 

the cost of securing a sufficient supply of workers. In 
computing necessary profits, finally, good years must be 
averaged with bad. Some years a business may yield 
no profits whatever, or may yield less than necessary 
profits. In others the returns may be above the mini- 
mum rate. But taking a term of years into considera- 
tion, we may safely conclude that marginal employers 
must secure the current rate of interest on their capital 
and a fair return for their personal exertion. 

§ 291. Those employers who produce goods for less 
than the marginal expense, for which the consumers 
have to recompense the marginal employers. Differential 
secure differential profits. These returns P^°*i^' 
are called " pure profits " by some economists. It is 
the prospect of these extra, unusual gains that leads 
men to prefer the greater risks and cares of business 
management to the smaller risks and cares of lending 
their capital to active managers. The amount of these 
differential profits depends upon the extent of the ad- 
vantage which these superior entrepreneurs have over 
the marginal producers. This advantage may arise from 
the following causes : — 

1. It may come from superior personal ability. The 
success of a business depends upon able management 
even more than upon efficient labor. Bad judgment in 
the purchase of materials or in the sale of the product 
may make all the difference between success and failure. 
Thorough supervision and efficient organization of all 
branches of the business have much to do with success 
in producing at a low cost. Superior personal ability of 



464 PRINCIPLES OF ECONOMICS, 

the employer accounts for part of the differential profits 
secured by some enterprises. 

2. The possession of patents may enable an employer 
to produce at less than the marginal expense, and so to 
secure a differential profit. In the words of Mr. Mill, 
"If the value of the product continues to be regulated 
by what it costs to those who are obliged to persist in 
the old process, the patentee will make an extra profit 
equal to the advantage which his process possesses over 
theirs." 

3. Mere chance or good fortune sometimes enables 
some employers to secure differential profits. 

Differential profits are likely to be of a temporary 

character. The personal ability of the entrepreneur may 

General con- enable the differential profit to continue 

siderationson ^^ring his lifetime, but at his death it is 
differential ^ ' 

profits. likely to cease. We have notable instances 

of great organizers who have earned immense personal 
profits that were not secured from the businesses after 
the founders died. Moreover, such personal profits are 
likely to disappear as soon as other producers succeed in 
producing at the same cost. This is happening continu- 
ally. The marginal cost of production steadily falls, 
and the advantage possessed formerly by superior em- 
ployers is lessened. In general it can be said that pure 
profits consist " of wealth created by the powers of given 
undertakers over and above what would have been pro- 
duced by the same application of labor and capital under 
less efficient leadership or management." They are a 
surplus that does not affect prices, since they are detei^ 



PROFITS. 465 

mined by the marginal expenses of production under 
the least efficient employers that are able to keep in 
business. " Anger at the great captains of industry on 
account of the pure profits which they acquire is not 
only groundless but insane. Kather it is the stupid and 
unsuccessful undertakers who deserve blame, sinking 
capital and starving laborers." 

§ 292. The profits secured by managers of monopo- 
listic undertakings differ from the profits gained in com- 
petitive enterprises. The causes that enable Monopoly 
entrepreneurs to secure the power to fix prices P^o^ts. 
at the point of highest net returns have been discussed in 
a previous chapter. These are rare personal abilities, 
exclusive legal rights and privileges, the monopoly of 
natural agents, or capitalistic organization. The amount 
of the profits gained by the monopolist will depend upon 
two circumstances : — 

1. It will depend upon the amount of his product that 
he can sell before he reaches the point of highest net 
returns, at which an increased product would lower prices 
so that the net profits from his sales would be decreased. 
This can be expressed in another way. Monopoly profits 
will depend upon the amount of capital that can be in- 
vested in the business before the product becomes so 
great as to oblige the monopolist to sell it at a lower 
price than that which yields the highest net returns. 

2. It will depend upon the surplus of price above cost 

on each unit of supply, on the product of each unit of 

invested capital. 

When a monopoly arises, not from rare personal abili- 
30 



466 PRINCIPLES OF ECONOMICS, 

ties, but from legal rights and franchises, from rare 
natural agents, or from capitalistic organi- 
profits may zation, the monopoly profits may be of a 
permanent permanent character. It is true that new 
character. inventions and new business methods may 
destroy such a monopoly, yet the profits secured from 
such a business are not personal, and are not due to the 
skill of one man. For this reason they are sufficiently 
permanent in character to make it possible to capitalize 
them and transfer them to other persons. Suppose that 
patents, rare natural agents, or capitalistic organization 
enable an employer to realize annually a net profit that 
exceeds by 130,000 the necessary profits secured by all 
employers. Then these monopoly profits may be capital- 
ized at the current rate of interest, say six per cent, and 
the business may be sold for |500,000 more than the 
actual capital invested in it. There have been many 
instances in which monopolistic undertakings have been 
capitalized at from two to five times the actual investment 
of capital. When the enterprise is of a quasi-public 
character, such as a gas company or a railroad, monopoly 
profits are often capitalized in order to conceal the ex- 
cessive profits realized on the capital actually invested. 

Since monopoly profits are realized by limiting the 
supply so that its price can be fixed at the point of high- 
concluding est net returns, it follows that they are a 
TmonopT^"' cause of high prices. All consumers pay 
profits. more than if prices were fixed at the point 

where they covered the marginal expenses of production, 
as they are in competitive undertakings. When monopoly 



LITERATURE. 467 

profits are capitalized and the business sold on the basis 
of such capitalization, consumers will continue to pay 
a monopoly price, while the managers of the enterprise 
will secure only an average rate of profit on their inflated 
capitalization. 



LITEEATURE OK CHAPTER XIV. 

General References : Andrews, Institutes of Economics, 158- 
189 ; Bohm-Bawerk, Capital and Interest, Positive Theory of 
Capital ; Ely, Outlines of Economics, 166-217 ; Gide, Political 
Economy, 473-552 ; Gunton, Social Economics ; Hadley, Eco- 
nomics, 264-335 ; Marshall, Principles of Economics, 566-790, 
Economics of Industry, 250-411; Mill, Principles of Political 
Economy, Book II. ; Bicardo, Principles of Political Economy 
and Taxation ; Roscher, Political Economy, Book III. ; Sidg- 
wiCK, Principles of Political Economy, 269-398 ; Smith, Wealth of 
Nations ; Walker, Political Economy, 187-291 ; Wieser, Natural 
Value. 

Special References : Clark, Capital and its Earnings ; Com- 
mons, The Distribution of Wealth : Patten, Dynamic Economics : 
Taussig, Wages and Capital ; Cannan, History of Theories of 
Production and Distribution ; Davidson, The Bargain Theory of 
Wages ; Spahr, The Present Distribution of Wealth in the United 
States. 



468 PRINCIPLES OF ECONOMICS. 



CHAPTER XV. 

THE WAGES SYSTEM. 

I. General Considerations on tlie Labor Contract. 
§ 293. The hired laborer sells liis labor to an em- 
ployer for a stipulated wage. The legal theory is that 
The nature of labor is property, and that the laborer sells 

the lahor r r ^ 7 

contract. his property to an employer, — just as the 
owner of any commodity may dispose of his property in 
a market. In this way labor is called a commodity, and 
the hired laborer is said to dispose of his commodity, 
labor, in return for stipulated wages. 

In theory, the modern labor contract is a free con- 
tract, voluntarily entered into by employer and em- 
Freedom of ployee. In this country the courts are 
con rac . inclined to insist that this theoretical free- 
dom shall be maintained, and that the law shall not 
interfere in the purchase and sale of labor more than 
in dealings in other commodities. They often declare 
laws unconstitutional that attempt to prevent certain 
contracts from being made by employers and laborers. 
Few people realize, however, that the freedom now 
claimed for the labor contract has not always existed. 
To consider merely the case of England, it is easy to 



THE LABOR CONTRACT, 469 

show that this has been developed largely during the last 
century. The Statute of Apprentices aimed to pre- 
vent employers from hiring laborers who had not served 
a seven-year apprenticeship and become connected with 
some guild, while it prevented laborers from choosing 
freely their occupations. Acts of Parliament attempted 
to regulate rates of wages, intrusting the assessment of 
wages to justices of the peace. These acts were not 
repealed until 1813 and 1814, although they had been 
nearly obsolete for some time before. In other words, 
the modern labor contract is an historical product; it 
has been modified in the past as it has assumed the 
present form, and it may be modified in the future. 

§ 294. Labor is bought and sold in the labor market 
in much the same way as any other commodity. But 

it is possible to show that labor differs i-aborisa 

. . special com- 

Irom most other commodities m important modity.with 

respects, several of which are here given. of its^own.^* 

Mrst^ it is evident that the laborer and his work are 

inseparable. The seller of other commodities parts with 

them when he effects his sale. " It matters The laborer is 

nothing to the seller of bricks whether they fromhis 

are to be used in building a palace or a JXr^*^' 

sewer ; but it matters a great deal to the seller of labor 

who undertakes to perform a task of given difficulty, 

whether or not the place in which it is to be done is a 

wholesome and a pleasant one, and whether or not his 

associates will be such as he cares to have." Since the 

worker is inseparable from his work, he is concerned in 

the conditions of his employment. The person who 



470 PRINCIPLES OF ECONOMICS. 

buys has to exercise necessarily some control over the 
person who sells labor. The buyer determines the 
question of residence and the place of work, to a very 
large extent. He has more or less control over the 
companions and all the surroundings of the laborer dur- 
ing working hours. This extends to circumstances that 
affect the health of the worker, such as sanitary condi- 
tions, and to those that may affect his safety, as in the 
case of machinery that endangers both body and life. 
Finally, the labor contract involves a large degree of 
control by the employer over the length of the working 
day and the time of beginning and ending work. 

In the second place, labor resembles a perishable com- 
modity which the seller is likely to be obliged to dispose 

Labor of in a forced sale. The hired laborer com- 

resemblesa ^ -, n j? ;i i,- u 

perishawe monly has small reserve lunds upon which 

commodity. \^q ^an depend for support, and is obliged to 
sell his commodity at once for whatever price may be 
secured.^ " The seller of any other goods, by the very 
fact that he has them to sell, has some capital upon 
which he can live while he is trying to make a satisfac- 
tory contract." Even if the goods are perishable, the 
seller has his labor to fall back upon as a means of 
support, while the laborer has merely his labor between 
him and starvation. Since the individual laborer is 
normally in the position of a man obliged to make a 
forced sale, he is at a disadvantage in making the labor 

1 Moreover, the laborer who loses a single clay's employment is usually 
unable ever to recover that lost opportunity. This is often true of capital, 
however, so that this peculiarity is not confined altogether to labor. 



THE LABOR CONTRACT, 471 

contract. Furthermore, poverty, and sometimes igno- 
rance, may prevent him from seeking the most favor- 
able markets. A laborer, especially if he has a family, 
finds it difficult to take his commodity, labor, to distant 
markets where wages are higher. 

A third peculiarity is connected with the one first 
mentioned. The supply of labor changes very slowly, 
and only through changes in the number of The supply of 
laborers. The supply of other commodities i^apecuSar^ 
can be decreased by stopping production. ™a™e^^' 
But it is far less easy to decrease the number of la- 
borers when falling prices lead to a partial suspension 
of productive industry, and throw many men out of em- 
ployment. When a decreased demand for labor causes 
both low wages and lack of employment, then large 
numbers of unemployed laborers press into the market 
and bid for work. Thus a decreased demand may bring 
an increased supply of labor into the market. On the 
other hand, when demand begins to increase after a 
period of hard times and low wages, a " reserve army " 
of certain unemployed laborers, " which the poor-houses 
at the expense of the whole population had supported 
. . . as long as dullness in the business continued," 
presses into the labor market and increases the supply. 
The price of labor cannot rise greatly as demand 
increases until this army of unemployed has been taken 
back into the ranks of industry. 

§ 295. Although in theory the labor contract is a 
voluntary agreement freely entered into by employer 
and laborer, the economist finds reasons for believing 



472 PRINCIPLES OF ECONOMICS. 

that this freedom is often more nominal than real. 

He finds that the peculiarities of the commodity, labor, 

are such that the individual seller is likely 

reSft-eedom *^ ^® ^^ ^ disadvantage as compared with 

In the labor the buyer, so that there may be no real free- 
contract. T . 

dom or equality m contracts for the sale of 

labor. An extreme instance of this is found in the case 
of a demand made that certain English mines should be 
inspected in order to prevent the recurrence of terrible 
accidents. The representative of the mine owners 
asked, " Is it not at the pleasure of the miners whether 
they go into the mines or not ? " " Certainly," was the 
answer of the witness, " but it is not at their pleasure 
not to starve if they do not go into the mines." When 
laborers have to make a forced sale of their labor, their 
freedom of contract is more nominal than real. When 
women and children stand individually before the man- 
ager of hundreds of thousands of capital, it is possible 
that there may be little freedom and less equality in the 
contract by which they sell their services. The public 
has become dimly conscious that between two parties of 
such unequal knowledge, resources, and strength as a 
single laborer and the employer of a hundred workmen, 
the wage contract cannot be entirely equal and free. 
As a matter of fact, the character of the contract has 
been appreciably altered in several directions, in order 
to secure greater equality of conditions between the con- 
tracting parties. In legislation and in actual practice 
alike we have realized that " there is no greater in- 
equality than the equal treatment of unequals." 



LABOR LAWS, 473 

II, Labor Laws and The Labor Contract. 

§ 296. When the Industrial Revolution necessitated 
the repeal of the old regulations by which English in- 
dustry had been restricted, employers and Restriction of 
individual laborers were left free to settle J^e labor con- 

tract Dy 
their mutual relations by a labor contract legislation. 

that was legally free. But such unrestricted freedom of 
contract soon produced some of the most terrible effects 
recorded in economic history. Women and children 
were forced to work in factories and mines under condi- 
tions that proved destructive of body and soul. Hours 
of labor were prolonged beyond the most extreme 
powers of human endurance, and no care was taken to 
protect the operatives from the most dangerous acci- 
dents. In 1802 Parliament passed the first of a series 
of Factory Acts, which gradually restricted the freedom 
of the labor contract. These laws were consolidated 
and systematized in 1878, and have been extended since 
that date. They have restricted the hours and condi- 
tions of employment of women and children, prohibiting 
the employment of children under a certain age, and 
preventing both women and children from contracting 
to work under improper conditions. Suitable ventila- 
tion and sanitation of factories have been required, and 
employees have been protected to some extent from 
injury by dangerous machinery. These laws applied at 
first only to women and children directly, not to adult 
males. At the present day there is less interference 
with labor contracts made by men. Yet acts prohibit- 



474 PRINCIPLES OF ECONOMICS. 

ing " truck " pajments,i regulating the payment of sea- 
men's and miners' wages, and the employment of all 
workers in certain dangerous trades, have seriously re- 
stricted labor contracts of adult males. 

In the United States there has been, on the whole, 
less restriction of the labor contract. Still many states, 

particularly in the Northeast, where man- 
Labor legisia- r 1 T 1 T 1 
tioninthe uiactures are lurther developed, have passed 
United states. ^^^^ ^^^^^ ^^ have laws requiring proper 

sanitation, ventilation, and protection of employees from 
bodily injury. " Truck " payments have often been 
prohibited. The employment of children under a suit- 
able age has been prevented in some cases, while the 
hours of employment of women and children have been 
limited to eight or ten in certain states. In this move- 
ment Massachusetts has taken the lead. 

§ 297. The student should be reminded, first of all, 

that many of the evils at which these laws are directed 

General con- existed before the present era of capitalistic 

stchr^trict" production. The growth of the factory 

ive legislation, system served partly to bring them to light, 

although it certainly did a great deal to intensify some of 

them. It will be seen that the fewest regulations have 

been placed upon labor contracts made by adult males. 

This has been because men have been considered to be 

better able to make equal contracts with employers, 

while women and children have been thought to need 

1 "Truck" payments are made in commodities supplied usually by 
stores kept by employers. They have often been resorted to as a means 
of robbing laborers by charging exorbitant prices that virtually reduced 
the real wages received. 



LABOR LAWS. 475 

more protection. These restrictions have been based 
upon the principle that wage-earners are not able to 
contract with their employers on entirely equal terms 
concerning those conditions of employment that re- 
strictive laws have sought to regulate. As a matter 
of fact, we must admit that the nominal freedom of 
the labor contract has been decidedly abridged as a 
result of this legislation. 

In this country the courts have often declared these 
labor laws to be unconstitutional, sometimes upon the 
ground that they have infringed upon the . 

right of free contract. But there has been cisionsof 
a lack of agreement in the decisions of 
the courts of the various states. Some courts uphold 
laws that others have declared unconstitutional, and 
judges in different states have declared the same laws 
unconstitutional on totally different grounds. Only a 
part of these conflicting opinions can be explained by 
differences in state constitutions, and the layman is 
rather driven to the conclusion that these particular 
questions of judicial interpretation depend largely upon 
latitude and Longitude. In the long run it seems proba- 
ble that the courts will uphold as much of this legis- 
lation restricting the labor contract as proves to be 
necessary to obviate evil results that are seen to occur 
from the practical inequality of the individual laborer 
and employer. Here, as in other cases, the courts 
will find ways by which they can uphold the consti- 
tutionality of legislation that experience shows to be 
necessary. 



476 PRINCIPLES OF ECONOMICS, 

III. Labor Organizations and the Labor Contract. 

§ 298. Modern labor organizations are combinations 
of hired laborers. They have developed naturally out 

of the sharp separation of the laborins; and 
Development i i o 

ofiaDor employing classes caused by modern capi- 

organiza ions. ^-g^Ug^-j^, production. As the distance between 

the employer and the hired worker widened, it was in- 
evitable that laborers should realize the need of combin- 
ing to protect and advance their interests as a class. In 
England the growth of labor organizations was more 
rapid than in this country, and the English trade unions 
are much further developed than the American. 

The earlier organizations, or trades unions, were com- 
posed chiefly of skilled workmen, and were organized 

in separate trades or crafts. They seldom 
Two types 
of labor acted together, and had little sympathy for 

organiza ons. ^j^Qpg^j^ized or unskilled laborers as a class ; 
but sought rather to further their own immediate inter- 
ests. The more recent organizations are represented in 
this country chiefly by the Knights of Labor, and in Eng- 
land by the " new trade unionism." They seek to unite 
all hired^ workers, skilled or unskilled, and to improve 
the condition of the entire class of wage-earners. Per- 
haps they show, also, more of a disposition to institute 
political movements in behalf of their class. More 
recently still, in this country, the trades unions and 
Knights of Labor liave copied each other's policy to 
some extent. The trades unions have formed central 
labor unions in cities, in which unions of different crafts 



LABOR ORGANIZATIONS. 477 

have joined in common action. Then thej have estab- 
lished the American Federation of Labor, a national 
combination of trades unions. Meanwhile the Knights 
of Labor have formed district assemblies composed of 
laborers organized by separate crafts. The American 
Federation of Labor and the Knights of Labor have not 
as a rule worked in harmony. The number of organ- 
ized laborers in the entire country is to-day estimated 
at more than two millions. 

§ 299. The objects of labor organizations may be 
classified in the following manner: — ob'etsof 

1. By regular assessments upon their laijor organ- 
members they raise large sums for the 
purposes of the associations. These funds often are 
employed in insurance and benefit schemes, by which 
sick, injured, or unemployed members are assisted. In 
1893 it appeared that 682 Englisli trades unions dis- 
bursed 110,928,076, of which sum fully one half was 
employed in this manner. The possession of this prop- 
erty makes these unions more conservative and more 
responsible organizations. 

2. They aim to educate laborers in various ways, and 
to promote culture and social intercourse among their 
members. In their debates and the administration of 
their affairs, members often secure valuable training. 

3. They frequently encourage cooperative enterprises 
among their members, and desire to promote self- 
employment. 

4. They sometimes enter into political movements, and 
thus influence much labor legislation in their favor. 



478 PRINCIPLES OF ECONOMICS. 

5, Finally, they aim to secure practical as well as 
nominal freedom and equality in the labor contract. 
For this purpose they seek to control the supply of 
labor in two ways : First, they assist laborers to move 
to less crowded labor markets when the supply becomes 
excessive. Second^ they may try to control the future 
supply of labor in particular crafts by restricting the 
number of apprentices admitted into each trade. More 
than this, they seek to secure collective bargaining 
with employers. This subject requires more detailed 
treatment. 

§ 300. Perhaps the most important single feature of 
labor organizations is their effort to substitute collective 
Collective bargaining between employers and associa- 
bargaining. tions of employees for contracts between 
employers and individual laborers. They believe that 
a single worker is usually at a disadvantage in making 
a contract with his employer, while an organization of 
laborers can drive a more equal bargain. Experience 
has shown that this is so. Organized laborers can refuse 
to make a contract on terms deemed unjust, because 
they can fall back upon the funds of their unions in 
case they lose an opportunity to work. This makes it 
less necessary to sell their labor at a forced sale, for it 
enables them to hold out for better terms. Secondly, 
labor organizations can prevent their own members from 
taking the places of those who refuse to accept the 
terms offered by employers, while often they dissuade 
outside laborers from doing so. This has compelled 
employers to offer better terms. 



LABOR ORGANIZATIONS. 479 

Organized laborers can, therefore, utilize the strike as 
a means of securing better terms. Manifestly, strikes 
are evil in themselves, since they cause loss strikes and 
both to employers and laborers; while they boycotts, 
arouse bitter contests of strength, and often incon- 
venience the public. They may be defended only when 
they are the sole alternative to yielding to unjust terms 
offered by employers. Many strikes have been unwise 
and unjust ; many others have been thoroughly justi- 
fiable. They are most likely to succeed in prosperous 
times, " upon a rising market." Sometimes, if employ- 
ers have engaged to complete large amounts of work 
within a certain time, the laborers may force a con- 
tract in which the employers are at a positive disad- 
vantage. From January 1, 1881, to the end of 1900, it 
appears that 22,793 strikes, involving 117,509 establish- 
ments, occurred in the United States. In 50.77 per cent 
of these establishments the strikes succeeded, in 13.04 
per cent they were partially successful, while in 36.19 
per cent they failed.^ Even when strikes fail, the knowl- 
edge that the employees are able to strike again may 
secure more favorjable terms to laborers, without the 
necessity for future occurrences of this sort. The boy- 
cott is a second weapon. It is " an organized attempt 
to coerce a person into compliance with any demand, 
through a combination pledged to abstain, and pledged 
further to compel others to abstain, from having social 
intercourse with him or to trade with him." Boycotts 

1 Sixteenth Annual Report of the Commissioner of Labor, 16, 35. 
(Washington, 1901.) 



480 PRINCIPLES OF ECONOMICS. 

are more objectionable than strikes, because they are 
more likely to cause interference with the rights of per- 
sons who are not directly connected with the original 
dispute. Yet if producers can be induced to place union 
labels upon their goods voluntarily, there is no reason 
why laborers, or any other consumers, should not pur- 
chase such products by preference. 

Mr. Stimson thinks that strikes, in themselves, have 

never been illegal in the United States.^ Laborers 

have had the ridit to combine to raise 

The legaUty ^ 

of strikes and wages by lawful means. But when they 
oyco s. jjayg combined to perform illegal acts, or 
when the primary motive of their combination has been 
to inflict personal injury, then they have been held 
guilty of conspiracy. In the case of the boycott, the 
courts have been inclined to hold that the primary pur- 
pose is to interfere with the business of others rather 
than to raise wages. Probably most people will agree 
that " the boycott is not the remedy to adjust differences 
between capital and labor," at least when enforced by 
coercion. In general it can be said that the law now 
leaves laborers free to combine to enforce their demands 
by any methods that do not conflict with the rights of 
others. Those who criticise labor organizations so 
freely for their use of strikes and boycotts, commonly 
overlook the fact that other classes of society use pre- 

^ In England the case was different. Early in this century legislation 
and the courts were opposed to the simplest combinations to raise wages. 
For this offence six laborers were transported into penal servitude as late 
as 1834. 



LABOR ORGANIZATIONS. 481 

cisely the same weapons. Between January 1, 1881, 
and January, 1901, there were lockouts in 9,933 estab- 
lishments in the United States. In these cases, em- 
ployers, either individually or in combination, locked 
out 504,307 employees in order to coerce them into 
compliance with dictated conditions. The boycott has 
long been used by many people. " The abolitionists 
boycotted siave-made products ; the temperance people 
have used the same method to repress the liquor nui- 
sance ; the pulpit has tried hard to boycott Sunday news- 
papers ; and recently there has been established in the 
city of New York a society, consisting of women occu- 
pying excellent social positions, pledged not to purchase 
goods of houses which do not furnish proper conven- 
iences for their saleswomen. Railroad companies have 
boycotted their men time and time again ; working 
people have boycotted railroads, dealers, and manu- 
facturers ; railroads combine and boycott other rail- 
roads ; and so the method has grown to be a familiar 
one with all classes, and one that is used in various 
ways." ^ No device of industrial warfare is more cruel 
than the form of boycott known as the " blacklist." 

§ 301. Manifestly, the labor contract is greatly modi- 
fied whenever combinations of laborers are able to 
induce or coerce employers into making Labor organi- 
terms primarily with the labor unions, mSedtte 
rather than with the individual employees, labor contract. 
This is a matter to which employers commonly offer 
serious objections. When labor organizations adopt a 

* Wright, Industrial Evolution of the United States, 319» 
31 



482 PRINCIPLES OF ECONOMICS. 

conservative policy, and choose men of ability, integrity, 
and character to represent them, employers are much 
more willing to treat with representatives of miions. 
Many capitalists have recognized the advantage of 
dealing with a responsible, conservative union, rather 
than with irresponsible workingmen. In England, 
where trades unions are better organized and more 
wisely managed, employers show much less disinclina 
tion to deal with them. Many careful thinkers and 
practical business men will assent to Mr. Stimson's 
opinion that " collective bargaining between associations 
legally organized and personally responsible on both 
sides . . , holds the future of the peace of labor." 
When American labor organizations become more will- 
ing to assume responsibility for the acquiescence of 
their members in the agreements made by the unions,^ 
and when they more generally place their best and 
wisest men in control of their affairs, employers will 
not long refuse to deal with them. Some zealous 
advisers of laborers urge upon them that they lose 
their personal independence by entering a union, by 
whose rules they must thenceforth be bound. The 
student will have no difficulty, however, in recognizing 
that wisely managed labor unions can increase the 
practical freedom of contract enjoyed by the employee, 
even if his nominal freedom is restricted by the rules of 
the association. 

1 The English unions accomplish this by their better discipline and 
leadership, and especially by means of their benefit funds, in which a dis- 
obedient member loses his share if he leaves the association. 



LABOR ORGANIZATIONS. 483 

§ 302. Labor organizations have often made mistakes 

and pursued short-sighted policies, as willing critics are 

fond of pointing out. Some of the criti- 

^ ^ other aspects 

cisms commonly passed upon them need to of labor 

, -J J organizations. 

be considered. 

1. They are called monopolies, and this is often true. 
For unions frequently seek to limit the number of 
apprentices in particular crafts, and to limit the supply 
of labor. Such measures may injure laborers in other 
trades by causing an oversupply there. These regula- 
tions may be considered legitimate methods of industrial 
warfare whenever employers seek to get all their work 
done by apprentices, by discharging a workman as sooi? 
as he completes his apprenticeship, or w^hen they try to 
keep large numbers of unemployed workmen in reserve 
in order to keep wages down. 

2. Labor unions sometimes limit the amount of work 
that their members may perform in a day. This is done 
with a view to making work for a larger number of 
laborers. Such action is very short-sighted, because a 
limitation of production simply decreases the social 
income available for all persons, laborers included. It 
may be compared with the action of monopolies in 
decreasing production, in order to cause scarcity and 
raise prices. 

3. The members of labor organizations often treat 
non-union men harshly and even cruelly, and interfere 
with the undoubted rights of laborers who are not mem- 
bers of unions. It is natural that members of unions 
should feel resentment at outsiders when they play into 



484 PRINCIPLES OF ECONOMICS, 

the hands of employers, but this does not justify inter- 
ference with the rights of persons that do not desire to 
join labor organizations. On the other hand, employers 
frequently discriminate against members of labor unions, 
and have combined to boycott them on a large scale. A 
favorite method of breaking down labor organizations is 
to discharge the men who take prominent parts in them. 
Labor organizations act within their undoubted rights 
when they resist by lawful means the replacement of 
their leading members by non-union men. 

4. Finally, it is said that labor organizations are based 
upon the principle of strife and cause industrial warfare. 
" In the minds of a large section of the public, labor 
unions are chiefly associated with strikes. It is believed 
by many who ought to know better that such organiza- 
tions exist for the purpose of striking, and that if the 
organizations were suppressed, industrial peace would be 
secured." ^ The truth is that labor organizations exist 
primarily to equalize the terms of the labor contract. 
In the early history of any union the strike has been 
used frequently as a means of accomplishing this end. 
In the long run, however, labor organizations grow more 
conservative and less disposed to strike, while their 
power and influence increase so that employers are more 
inclined to offer fair terms, thus making strikes unneces- 
sary. So long as the labor contract depends rather upon 
the relative strength of the contracting parties than 
upon considerations of exact justice, there is bound to 
be more or less strife between laborers and capitalists. 

* Hadley, Economics, 353. 



RELATION OF LABORERS TO THE PRODUCT. 485 

This is not an entirely satisfactory condition of affairs, 
but only half of the responsibility for it rests upon the 
laborers. In the future, collective bargaining may re- 
duce this strife to a minimum. 

IV. The Unfavorable Relation of Laborers to the Prod- 
uct of tiieir Labor. 

§ 303. Experience has shown that laborers receiving 

time wages are likely to have little interest in turning 

out a lar^e product, except what comes 

° ^ ^ Time wages 

from the knowledge that they will lose their and piece 

positions if they are too inefficient. Piece ^^^^^* 
wages may give the employee a greater incentive to dili- 
gent work. But they have often been used by employers 
as a means of getting employees to do more work, and 
then the rate of wages per piece has been reduced ; so 
that laborers have had to do more work in order to se- 
cure the same wages that they formerly received under a 
time wage. Such experiences have inclined workers to 
look with suspicion upon the proposal to adopt piece 
wages, and have led them to refrain from increasing 
their efficiency under the system. It is not too much to 
say that, under the average conditions of time or piece 
wages, laborers do only seventy or ninety per cent of the 
work that they could reasonably do, if furnished with a 
sufficient incentive. 

§ 304. Some employers have realized that their labor- 
ers did not work up to their highest efficiency progressive 
under the ordinary methods of paying wages, wages, 
and have adopted various systems of progressive wages. 



486 PRINCIPLES OF ECONOMICS. 

Under these methods the employees have been guaran- 
teed a minimum time wage ; and have been offered a 
premium for attaining more than a certain degree of 
efficiency, — that is, for exceeding a certain amount of 
work each hour or day. It is impossible to present here 
the details of these experiments with progressive wages ; 
but, when they have been introduced in good faith by 
employers, it has been found that the average product of 
each worker has increased largely, occasionally as much 
as eighty or one hundred per cent. 

§ 305. Progressive wages have served to increase the 
laborer's efficiency, but they have not avoided entirely 

Profit disputes between employers and employees. 

sharing. Profit sharing is a plan for giving the laborer 
an inducement to work efficiently, and for securing 
greater harmony of interest between employers and 
workmen. Under its provisions hired laborers are given 
shares in the profits of the business, the share of each 
workman being determined beforehand upon some equi- 
table basis. The purpose of such an arrangement is to 
induce laborers to increase their output, improve its 
quality, and thus contribute toward the creation of extra 
profits in which they may share. In some instances ex- 
periments in profit sharing have had this result, and 
have proved at least moderately successful. But in 
many cases they have proved unsuccessful, and have 
been given up. A common reason for such failure is 
that there have been very small profits to divide, or even 
no profits at all ; so that laborers have had little interest 
in the scheme, and have not hesitated to strike if there 



RELATION OF LABORERS TO THE PRODUCT. 487 

was any prospect of immediate advantage resulting from 
such a course. 

Experience has shown that profit sharing does not do 
away with strikes, although in some cases it has pro- 
moted a better understanding and feeling 

^ ° Merits 

between employer and employed. Concern- of profit 
ing its merits as a plan for distribution, the * ^^^^* 
following points may be noticed. If the share of profits 
received by laborers is created by increased efficiency 
and exertion on their part, then it may be as favorable 
to efficient production as systems of progressive wages, 
but hardly more so. Unfortunately, however, the profits 
actually realized by a business depend so much upon 
good management by the employer that their amount 
may not vary proportionately with the increased zeal and 
efficiency of the workers. Laborers may increase their 
product ten per cent, but bad business management may 
result in an actual loss on the sales. In such a case 
profit sharing may be unjust to the employee. On the 
other hand, if the profits received by the laborers are 
merely a gratuity from the employer, then the system is 
unfair to him. For laborers would be made to share in 
any profits earned by the business, while they would 
bear no share of the losses. In conclusion it may be 
said that profit sharing has accomplished less than its 
more ardent supporters have expected. 

§ 306. Cooperation, in the technical sense, has had 

two distinct forms. First, consumers have 

Cooperatioii. 
combined to conduct the exchange of prod- 
ucts, that is, wholesale and retail trade, in order to save 



488 PRINCIPLES OF ECONOMICS. 

the charges made by middlemen. In England many 
successful cooperative stores have been established, but 
in this country they have been less numerous and impor- 
tant. To this form of cooperation the name consumers* 
or distributive cooperation has been given. The second 
form is productive cooperation. Workmen have com- 
bined to establish and conduct productive enterprises 
upon their own account. They may contribute nearly 
all the capital, or may borrow a part ; but they become 
their own employers and form a collective undertaking. 
Productive cooperation has had little success in England, 
but rather more in France ; while a few such enterprises 
have succeeded in the United States. 

Manifestly, productive cooperation is a radical change 
from the present organization and supervision of in- 
dustry by individual entrepreneurs employ- 
of productive ing large numbers of hired laborers. In 
coopera on. g^^^g f^^^ cases wliere it has succeeded, its 
advantages have been very great. It has made impos- 
sible strife between employing and laboring classes. 
Self-employed workers have shown activity and zeal in 
their labor that hired laborers do not exhibit. It has 
encouraged frugality, since it furnishes a strong induce- 
ment to saving. Finally, the responsibility and experi- 
ence of proprietorship have had an excellent moral 
influence upon the cooperators. 

In cooperative production the place of the entrepre- 
neur is taken by a manager elected by the workmen. 
Now, it is all-important for the success of the enterprise 
that the manager shall have the same skill that indi- 



CONCILIATION AND ARBITRATION. 489 

ndual entrepreneurs possess. If he fails to show sufficient 
ability, the business will prove a failure. Cooperators 
are not inclined to pay enough to keep the Difficulty of 
most able men in their service, so that if a cSperSive 
successful manager is found they are likely production, 
to lose him. Moreover, differences of opinion among 
cooperators are likely to cause dissensions that lead to 
divided counsels and inefficient management. Coopera- 
tive production has succeeded best when the business 
has not been of a complex character, when skillful man- 
agement has counted for less, and efficient workman- 
ship has availed more. Finally, laborers have seldom 
had sufficient capital and credit to enable them to secure 
the means of establishing large enterprises. These 
difficulties have generally circumscribed narrowly the 
field where cooperative production could prove a success. 
The conclusion seems warranted that cooperation is an 
ideal system when possible, but that the difficulties at- 
tending it are so great as to make it impossible for us 
to expect very much from it in any immediate future. 
The entrepreneur will continue to organize and direct 
the large majority of business enterprises, for he seems 
able to insure to society the most efficient direction of 
its productive forces. 

V. Conciliation and Arbitration. 
§ 307= In contracts for the sale of ordinary commodi- 
ties, disagreements between bargainers seldom lead to 
conflicts between the contracting parties. But the labor 
contract is peculiar in that the person of the laborer 



490 PRINCIPLES OF ECONOMICS. 

and his work are inseparable. Human interests are 
involved in an especial degree in changes of the supply 
The labor of labor, and in all the conditions of em- 
industriai ployment subsequent to the conclusion of an 
warfare. agreement between employers and laborers 
on the matter of wages. Hence it is easy for the con- 
flict of interests to become serious when differences 
arise between the parties to the labor contract. La- 
borers resort to strikes and boycotts ; employers adopt 
the lockout and the blacklist. When such disputes oc- 
cur they are settled usually by a trial of strength 
between employer and employees ; and, since might, 
not reason, is appealed to as the usual arbiter, conflicts 
between laborers and capitalists are justly described as 
" industrial warfare." 

§ 308. Few persons are satisfied with appeals to force 
as the principal method of adjusting the relations of 
Industrial laborers and employers. One remedy for 
conciuation. ^]^q present unsatisfactory relation has been 
found ill boards of conciliation voluntarily established 
in various trades. Employers and laborers in the same 
trade have selected representatives to form a committee, 
or board, before which all differences shall be brought 
for calm and fair consideration before they can lead to 
serious disputes. When this expedient has been fairly 
tried in good faith, it has been found that nearly all 
disputes can be settled by the boards to the ultimate 
satisfaction of both parties. Both employers and la- 
borers have taken care to avoid mistakes, and a fair 
settlement, even of questions of wages, has usually been 



CONCILIATION AND ARBITRATION 491 

possible. Strikes or lockouts have often been avoided 
for long periods of years. Voluntary boards of concili- 
ation have demonstrated that it is not impossible to 
reconcile conflicting claims of laborers and employers 
on a basis of reason and justice, without appeals to 
trials of strength, that is, appeals to force ; they have 
proven that most labor controversies are unnecessary, 
arising in misunderstanding and distrust, rather than 
in the desire of either party to wrong the other ; while, 
finally, they have shown that mutual respect, confi- 
dence, and good-will may prevail between employers 
and employed, in place of the mutual distrust, and even 
class hatred, that too often characterizes their relation 
at present. 

§ 309. When disagreements between employer and 
employee lead to an open rupture, such as a strike or 
lockout, disputes have sometimes been sub- voluntary 
mitted to arbitration by unprejudiced judges. 
Sometimes when boards of conciliation have failed to 
agree on a certain subject, it has been submitted to the 
decision of some umpire or arbitrator. In this country 
several states have established boards of conciliation 
and arbitration, which are generally authorized to in- 
vestigate any dispute between laborers and employers, 
and to offer their services in securing a settlement. In 
Massachusetts this method has been found quite success- 
ful in settling many disputes ; but the board has done its 
best work in the field of conciliation, where it has secured 
the settlement of many questions that might have led to 
strikes and lockouts. Arbitration voluntarily accepted 



492 PRINCIPLES OF ECONOMICS. 

by tlie^ parties to the dispute is the wisest and most ad- 
vantageous method of settling differences when a strike 
or lockout has actually occurred. But it is altogether 
desirable to prevent, by conciliation, the disturbance of 
friendly relations between employers and laborers. 

§ 310. It has been proposed to compel by law the 
adjustment of labor controversies by arbitration. Com- 
Compuisory pulsory arbitration of this character presents 
arDitration. gerious difficulties. The first is that, while 
it is easy to enforce the decision of the arbitrators upon 
the capitalist, it is generally impossible to compel the 
laborer to abide by it permanently.^ To remedy this 
difficulty it has been proposed to have labor organiza- 
tions incorporated, so that judgments can be enforced 
against them. But this proposition is not at present 
widely favored by laborers. In the second place, if 
laborers could be compelled to work at wages fixed by 
arbitration, it is questionable whether they would render 
willing service, and whether their labor would not prove 
as inefficient as slave or prison labor. Finally, it is 
claimed that capitalists would not invest their capital 
under any such condition as compulsory arbitration of 
labor disputes. This is a favorite answer to any pro- 
posal for limiting the powers of capitalists. Capital 
must be invested, and only a small portion could flow 
out of the country. It is possible, however, that com- 

1 It is easy to find enough property belonging to the employer to enable 
the judgment of the arbitrators to be enforced upon him. With laborers 
this is seldom possible, while imprisonment would probably be an impos- 
sible punishment for a refusal to work under unsatisfactory conditions. 



LITERATURE. 493 

pulsory arbitration might be enforced in an unjust man- 
ner that should prove destructive to the interests of 
employers. This would discourage the growth of capital 
and check the development of industry. If, on the other 
hand, compulsory arbitration should be fairly adminis- 
tered, there is no reason to fear that the capital of 
society would be impaired. Most people will agree that 
compulsory arbitration would be such a serious limita- 
tion upon the labor contract that it must be considered 
undesirable as long as there are other possible methods. 



LITEEATURE ON CHAPTER XV. 

General References : Brentano, The Relation of Labor to the 
Law of To-day ; Bulletin of the Department of Labor, Nos. 1 and 
2 ; Ely, Outlines of Economics, 187-197, The Labor Movement in 
America ; Oilman, Profit Sharing ; Hadley, Economics, 336-369, 
404-421 ; History of Cooperation in the United States ; Hobson, 
Evolution of Modern Capitalism ; Holyoake, History of Coopera- 
tion in England; Howell, Conflicts of Labor and Capital, Handy 
Book of the Labor Laws ; Jevons, The State in its Relation to 
Labor ; Jones, Cooperative Production ; Lowell, Industrial Arbi- 
tration and Conciliation; McNeil, The Labor Movement; Mill, 
Principles of Political Economy, Book IV. Chap. 7, Book II. Chaps. 
12, 13, 14 ; Potter, Cooperative Movement in Great Britain ; 
Price, Industrial Peace; Rae, Eight Hours for Work; Rogers, 
Work and Wages, Chaps. 14 and 18 ; Schloss, Methods of Indus- 
trial Remuneration ; Stimson, Labor in its Relation to Law, Hand- 
book of the Labor Law of the United States; Taylor, Profit 
Sharing; The Adjustment of Wages to Efficiency; Walker, Polit- 
ical Economy, 375-394, The Wages Question ; Webb, History of 
Trade Unionism ; Wright, Industrial Evolution of the United 
States, 231-320, Report on Conciliation and Arbitration ; Lloyd, 
Labor Copartnership ; Webb, Industrial Democracy. 



494 PRINCIPLES OF ECONOMICS. 



CHAPTER XVI. 

LAND NATIONALIZATION. SOCIALISM. 

I. Land Nationalization. 

§ 311. About 1870 a movement in favor of land 

nationalization started in England. The Land Tenure 

TheEngUsh Reform Association advanced the proposi- 

Land Tenure ^-^j^ ^^id^t the State should take by taxation 

Reiorm Asso- '' 

ciation. all, or nearly all, of the future increase of 

the rent of land. Present landowners were to have 
the option of " relinquishing their property to the State, 
at the market value which it might have acquired at the 
time when this principle may be adopted by the Legis- 
lature." The Association claimed that its proposal was 
just and desirable because the growth of ground rent 
(the economic rent of land in the strictest sense, apart 
from improvements made upon it) is due to ^'the growth 
of population and wealth," " without any effort or out- 
lay by the proprietors." 

§ 312. More recently, Mr. Henry George has started 

an agitation in favor of the seizure by the State, not 

merely of the future "unearned increment " 

Henry George „ . 

and the single of land rentals, but of the entire economic 

rent of land. He would accomplish this; 

end by imposing upon land a single tax equal to its* 



1 



LAND NATIONALIZATION. 495 

annual economic rent; that is, its rental value apart 
from all improvements. Moreover, he has denied the 
justice or necessity of compensating landowners by 
allowing them to sell to the State their lands at the 
market value. It is evident that such a plan is equiva- 
lent to national ownership, or nationalization of land. 

§ 313. Mr. George is not a socialist. He believes 
that men should have the right of property in all prod- 
ucts of their labor. But he denies that the 

The arguments 
economic rent of land is the product of any advanced by 

activity of the landlord, and claims that it is ^^-^^^^e. 
due entirely to the growth of population, which increases 
the demands made upon the land, and raises rents. His 
arguments depend upon this fundamental proposition, 
and we may present them in the following manner. 

1. All social progress increases the demand for land. 
The law of diminishing returns ^ drives investments 
of labor and capital onto poorer margins, and increases 
rent. Thus the tendency of progress is to give land- 
lords more, leaving less for all other people. There- 
fore, progress will always cause poverty as long as land 
remains in the hands of private owners. There are two 
fallacies in this argument. First, all social progress 
does not increase the demands made upon land. The 
improvements in manufactures of the last century have 

* Mr, George formally denies the law of diminishing returns (see 
"Progress and Poverty," Bk. II., Chaps. 3 and 4). But he undertakes 
to demonstrate the invariable connection between progress and poverty 
by means of Ricardo's law of rent, — a law based upon the assumption 
of the law of diminishing returns, and meaningless upon any other 
assumption. 



496 PRINCIPLES OF ECONOMICS, 

increased enormously the product secured from each 
acre. Improvements in agriculture constantly enable 
the supply to be produced from better grades of lands, 
throw poorer grades out of use, and decrease rents. 
Improved means of transportation enable the best grades 
of lands in all parts of the world to be utilized, and they 
have reduced rents on older lands. The progress of the 
last century has notably increased rents only in the case 
of land especially desirable for use in commerce and 
transportation, and this mainly in large cities. The 
second fallacy is that of supposing that, in any case, 
the demand for land can increase indefinitely, and can 
throw most of the product into the hands of land- 
lords. The growth of population, which is the principal 
cause of an increased demand for land, is limited by 
the desire of men to maintain their standard of living, 
or even to raise it. Beyond the point set by the standard 
of living, population, and hence this principal demand 
upon la-nd, will not increase.^ Our first conclusion was 
that progress does not necessarily increase, on the whole, 
the demands made upon the land, although it may enor- 
mously increase the demands made upon favored situa- 
tions. Our second conclusion must be that population, 
hence the principal demand upon the land, can never 

1 This point is worked out more fully in Ely, " Outlines of Economics/* 
175-176. Furthermore, Bohm-Bawerk has called attention to an equally 
important fact. "Just as effectually as the claims of the worker may 
and do prevent cultivation being extended to a point at which labor does 
not obtain even its own costs of subsistence, may the claims of capital 
prevent an excessive extension of the limits of cultivation, and actually 
do prevent it." See ** Capital and Interest," 93-94. 



LAND NATIONALIZATION, 497 

increase beyond the point set by the claims of capital 
and by the desire of laborers to maintain their standard 
of living. Nothing could be more incorrect than the 
theory that rents paid to landowners are a necessary 
cause of poverty, attending all social progress. 

2. Mr. George holds that a single tax, equal to the 
rental value of all land, apart from improvements, would 
yield more than enough to support the government, and 
would make all other taxation unnecessary. His scheme 
would secure for the uses of society that part of the 
product of industry that landowners now acquire as a 
result of social growth and development. He holds 
that all other taxes discourage capital and labor, but 
that the single tax on land would not discourage indus- 
try. It is impossible to determine exactly how much 
the single tax would yield in the United States, and 
we cannot say certainly that it would yield more or 
less than enough to cover the expenses of our govern- 
ments, national, state, and local. But on financial 
grounds, which cannot be enlarged upon here, any 
single tax is highly objectionable, and is condemned 
by all authorities.^ 

3. Mr. George urges very strongly that it is unjust 
to allow any persons to own the land, which is a free gift 
of nature to all men. All people should have an equal 
opportunity to use the land, and landowners infringe 
upon this natural right. Since private ownership of land 

^ See Bastable, " Public Finance/'312-319 ; Plehn, " Public Finance/' 
105-110; Ely, "Taxation," 88,89; Seligman, "Essays in Taxation,'' 



498 PRINCIPLES OF ECONOMICS. 

is wrong, it is not necessary to compensate present own- 
ers, especially since so many existing titles to land were 
based originally upon violence and robbery. Modern 
writers, however, have practically given up the attempt 
to define " natural rights." They hold that all of a 
person's rights are based upon considerations of social 
utility, and, therefore, consider the justice of landowner- 
ship to be a question of social utility. As a matter of 
fact, most of Mr. George's arguments aim to show the 
injurious effects of landownership. 

§ 314. In studying Mr. George's plans for land na- 
tionalization, the following considerations are important : 
Special con- ^' ^^ ^^^ sense of the word, economic 
siderations rent may be called an unearned income : yet 

concerning 

land nation- it accrues mainly to people who incur the 
ahzation. rigks of investing in land, and cannot be 
secured without the exercise of foresight. Now, Mr. 
George assumes that such investors never lose, but al- 
ways gain. This is far from true, as has been pointed 
out (§ 276), At present, investors run the risk of loss 
when they purchase land and improve it. This risk is 
counterbalanced by the prospect of an increase in eco- 
nomic rent. Mr. George would have the State appro- 
priate all such increments of economic rent, while 
investors would bear all the losses on improvements 
that should become unprofitable on account of changes 
in the direction of the growth of the community. The 
late President Walker said, justly, " Heads I win, tails 
you lose, is not a game at which the State can, in fair- 
ness or decency, play a part." If the State takes from 



LAND NATIONALIZATION 499 

an investor all increments of rent due to social causes, it 
should guarantee him from losses on capital invested in 
improvements, provided that those losses result from 
social causes over which he has no control. 

2. As a revenue measure, the single tax would often 
prove a disappointment. In England, for instance, the 
rents of practically all agricultural lands have steadily 
fallen for more than twenty years. If the English gov- 
ernment had bought out all owners of agricultural lands 
at the time when The Land Tenure Reform Association 
proposed such a course, it would have made a decidedly 
bad investment. In many states of our Union the same 
thing is true of agricultural rents, while it has occurred 
repeatedly in cities. 

3. We must admit that a large unearned increment 
of ground rents is secured by the owners of specially 
favored lots. No one would question the justice of im- 
posing a part of the burden of taxation upon such an 
income ; ^ but we should not forget that there are other 
unearned incomes besides those secured from some 
pieces of land. When a monopoly of any sort develops 
an unusually profitable field of investment, part of the 
monopoly profits are an unearned income, and should 

1 Most writers favor heavier taxation of economic rent, and lighter 
taxation of improvements, particularly in cities where the two things can 
be separately estimated with ease. The common practice of taxing un- 
improved land for only a very small percentage of its market value is 
bad. It places a premium upon withholding land from use, and waiting 
for a rise in its value. It discourages the improvement and use of such 
land, because the assessment of the land itself is raised as soon as im- 
provements are made. 



500 PRINCIPLES OF ECONOMICS, 

be taxed also. As a simple matter of fact, all those 
persons who have the good fortune to be favorably 
affected by each actual turn of social development are 
likely to receive unearned incomes. It is just to tax 
all of these incomes whenever they can be reached with 
certainty ; but to tax them all away is quite a different 
matter. Finally, in the United States, there are practi- 
cally no restrictions upon the purchase or sale of land. 
Any unearned increment is likely to be distributed quite 
widely, because landownership is widely extended. 

4. Mr. George's plan of confiscating the value of land 
without compensating present owners does not appeal 
to the conscience of the average American as just. 
Society has allowed private landownership in this coun- 
try ever since English settlement. The present owners 
have invested in land in good faith. If it should be 
decided inexpedient to continue our present system, the 
burden of the change should not be thrown upon the 
single class of landowners. 

II. Socialism. 

§ 315. " Socialism is that contemplated system of in- 
dustrial society which proposes the abolition of private 

. propertv in the ffreat material instruments 
Definition and ^ ^ - » 

explanation of of production, and the substitution therefor 

sm. ^£ collective property ; and advocates the 

collective management of production, together with the 

distribution of social income by society, and private prop' 

erty in the larger proportion of this social income." ^ 

1 Ely, Socialism and Social Reform, p. 19, 



SOCIALISM, 601 

Four important features common to all socialistic 
schemes are contained in this definition of Prof. Elj's.^ 

1. Socialists desire common or social own- 

The four car- 
ership of land and productive capital, the dinai elements 

important material factors of production. ^° ^™' 

This would require the abolition of private ownership 

of these forms of property, as allowed by our present 

laws. Some socialists have favored the compensation 

of present owners of land and productive capital ; others 

deny the justice or necessity of doing so. 

2. Socialism means, in the second place, the organi- 
zation and management of productive enterprises by 
society. This means, of course, management by gov- 
ernment, either as constituted at present or as reformed 
under the socialistic regime. Mr. George, who favors 
the nationalization of land, would leave the management 
of industrial enterprises to private individuals. Social- 
ists hold that private management of industry leads to 
disastrous results. Under socialism, persons engaged 
in productive industry would become practically govern- 
ment employees. 

3. In the third place, socialism means that the social 
income shall be distributed among individuals by the 
authority of the government, and according to some 
plan that will secure a just distribution of wealth. 

4. Finally, socialism would allow private property in 
the incomes received by individuals from the govern- 
ment. Part of the income of society would be reserved 

1 It mnst be understood that this explanation aims at essential features 
mereljj and has special reference to the modern forms of socialism. 



502 PRINCIPLES OF ECONOMICS. 

by the government for public purposes, as is done at 
present by our systems of public revenues. In our high- 
ways, parks, libraries, and schools, individuals receive at 
the present a considerable portion of their real incomes 
out of a common fund. 

It is possible to call any form of governmental activity 

socialistic. Our post-office is a socialistic institution 

in this sense of the term, and any person 

Ambiguous use . . , . „ 

of the term who prefers national to private ownership of 
soc sm. ^^ p^^^ office is a socialist, to that extent. 
Municipal ownership of water works is socialistic, and 
hundreds of our towns and cities have adopted this form 
of socialism. Those who are properly called socialists 
differ from the rest of us, who oppose their projects, sim- 
ply in the extent to which they favor social ownership 
and management of industrial enterprises. The term 
" socialist " is ignorantly or dishonestly applied as a term 
of reproach to any one who proposes that the govern- 
ment shall assume control of any new classes of enter- 
prises. People have ceased to be scared by the mere 
name of socialism. In the broad sense of the term, we 
are all socialists. Technically, however, socialism should 
mean the proposal to adopt social ownership and man- 
agement of all important productive enterprises, leaving 
practically nothing to private initiative. Few people in 
this country favor such a policy at the present time.^ 

1 In order to avoid the reproach considered to accompany the word 
" socialist," the name of " nationalist " has been adopted by many persons in 
this country who favor socialism. In Europe the word ** collectivism " is 
used. 



SOCIALISM. 503 

Socialism must not be confounded with anarchism. 
The anarchist believes that all control or coercion of 
one individual by another is wrong ; that sociaUsm and 
government implies such control, and is anarchism, 
necessarily a bad thing ; and that the worst traits of 
human nature have been caused by the repressive in- 
fluence of government. Therefore anarchists desire 
to overthrow all governments. With these abolished, 
anarchists profess to believe that men would voluntarily 
cooperate in some manner to effect such purposes as 
could not be secured by individual action. The socialist, 
desiring to place the control of all industry in the hands 
of the government, cannot well be an anarchist at the 
same time. As a matter of fact, socialists and anarch- 
ists have antagonized each other most bitterly. 

§ 316. Some socialists have desired to secure their 
ends by sudden revolutionary measures. Such ideas 
have generally been given up, and intelligent 

Revolutionary 

socialists now look forward to a more or and evoiution- 
less gradual socializing of the means of pro- ^^ ^°" ^^ 
duction. At the present time evolutionary socialism 
takes one of two forms : Firsts it is looked upon 
merely as a gradual extension of existing governmental 
institutions. Governments already carry on many more 
branches of activity than people usually realize. One 
class of socialists,! therefore, looks forward to the as- 
sumption by the government of one branch of industry 
after another, as fast as the public can be convinced that 

1 This class is represented by the English socialists of the Fabian 
Society. 



504 PRINCIPLES OF ECONOMICS, 

such a course is desirable and necessary. The second 
group is represented by the German socialists, the fol- 
lowers of Karl Marx. They hold that socialism will be 
the inevitable result of known forces that operate in the 
economic world. These are the forces of modern capi- 
talistic production. The growing importance of capital 
in modern machine industry has replaced small-scale by 
large-scale production. At the present moment trusts 
and industrial combinations are alleged to be replacing 
individualistic production on a large scale. In the future 
all branches of production will be concentrated in the 
hands of a few monopolies ; and then governments will 
interfere to assume the ownership and direction of all 
industries. 

§ 317. Socialism is not new, but is a very old theory 

that has reappeared constantly in one form or another, 

at least since the time of Plato. It has 

Socialism a 

veiyoid been advanced often when a sharp separa- 
^°^* tion between the classes of rich and poor 

has brought the problem of poverty to the front. Ideals 
of political or social equality have been another cause of 
socialistic theories.^ Plato's " Republic," with its pro- 
posals for the extremest subordination of individual life 
to the direction of the State, has for its background a 
sharp separation of classes, and a bitter conflict between 
rich and poor, that occurred not only in Athens but in 
most of the Grecian cities. In the sixteenth and seven- 
teenth centuries, the social distress caused by widespread 

1 See EoscHER, I. 237-239, for an interesting statement of the condi- 
tions favorable to the growth of socialism. 



SOCIALISM. 505 

economic and political changes led to such works as Sir 
Thomas More's " Utopia " and Campanella's " City of 
the Sun." Again, in the eighteenth century, the misery 
existing in France before the Revolution furnished a fruit- 
ful field for socialistic speculations. Finally, since the 
Industrial Revolution, the increased importance of capi- 
tal has caused a sharper separation of capitalists and 
laborers, and has furnished the ground for the growth 
of modern socialism. This movement has been strength- 
ened by the growth of democratic political ideals.^ 

§ 318. Socialists criticise severely our present methods 
of producing wealth, and hold that production could be 

much more efficiently managed under social- 
Critical exam- 
ism. They urge that competitive methods ination of sc- 
are "planless." Producers now work at feSnto^e 
i cross purposes ; mistakes are common ; and production 

. . . , /.of wealth. 

! our industry is far less productive than it 

would be if managed on the largest possible scale, in 
accordance with comprehensive general plans. Sec- 
ondly, our present competitive methods cause a great 
deal of waste. Not only have we much unnecessary 
reduplication of plants, but also needless expenses for 

1 The student would find it interesting to read Plato's " Republic ** ; 
see Jowett's " Dialogues of Plato,'* III. There is hardly a better criti- 
cism of socialism than that passed by Aristotle upon Plato's schemes ; see 
Aristotle's " Politics," Bk. II., Chaps. 3 and 5. Plato's " Republic " has 
been called " the fruitful parent of modern Utopias ; " and, after studying 
it, the student might read the socialistic romances contained in Moklet's 
" Ideal Commonwealths," especially More's " Utopia " and Campanella'? 
" City of the Sun." Then Mr. Bellamy's " Looking Backward," the best 
known of the romances representing modern socialism, might be read in 
connection with these earlier writers. 



606 PRINCIPLES OF ECONOMICS. 

advertising, traveling salesmen, and similar purposes. 
Thirdly, producers have a strong inducement at present 
to increase the value of their commodities by restricting 
the output, as is done by the anthracite coal monopoly. 
Society is poorer on account of the artificial scarcity 
created in this way. Again, socialists show that there 
is great waste in our methods of exchanging products. 
Many more people are engaged in wholesale and retail 
trade, especially in the latter, than are really needed. 

We must admit that there is a great deal of truth in 
all of these criticisms. But such an admission does not 
Objections to necessarily lead to the acceptance of social- 
schmeTor^ ism. For the weakness of socialism is even 
production, greater than that of the present system. 
1. First of all, will socialism lead men to exert them- 
selves as actively as they do at present under the desire 
for pecuniary gain ? Socialists urge that the desire for 
social esteem is a powerful motive at present, and would 
prove still more so under their system. But while many 
people are influenced by the desire for social esteem, 
others, apparently, are not deeply affected by this 
motive. Moreover, social esteem of one kind or another 
can be gained at present by many actions that do not 
conduce to the real welfare of society ; and it is not clear 
that, under socialism, public opinion would so change 
that men could not gain notoriety in ways that would 
be thoroughly harmful. Also socialists claim that 
altruistic motives may be expected to have greater 
force under a socialistic regime. But we have no expe 
rience that justifies us in assuming that the majority of 



L SOCIALISM. 507 

men will, in any immediate future, exert themselves as 
actively under the influence of such motives as they 
do at present under the stimulus of self-interest. Of 
course, the socialistic State might compel men to work. 
But would such labor be more effective than that of 
slaves or convicts ? 

2. The difficulties of organizing and managing all 
industries on a national scale are enormous. These 
difficulties would be especially great in industries like 
agriculture that do not lend themselves readily to large- 
scale production. Moreover, governmental management 
presents serious problems, chiefly the difficulty of secur- 
ing as honest and efficient administration as can be 
secured by private enterprise, at its best. Doubtless our 
methods of public administration can be improved, and 
would be further improved before the government 
should assume the control of industry. But we have 
no reason to believe that the government could avoid 
errors, or that, on the whole, it could carry on manu- 
factures and agriculture more successfully than they are 
conducted at present. 

3. Another difficulty that socialism would encounter 
would be the determination of methods for distributing 
the labor force among the various employments. Some 
are much more pleasant or are esteemed more highly 
than others. Will it be possible for the government 
to apportion the more important or more desirable 
positions in such a way as to cause less dissatisfaction 
than at present ? A very important question arises 
here. By eliminating incompetent persons from the 



508 PRINCIPLES OF ECONOMICS. 

field of competition we manage fairly well at present to 
secure able management of industries ; and we offer the 
prospect of exceptional profits as a reward for special 
efficiency. Will the mass of people living under a 
socialistic government consent, by their votes or other- 
wise, to adequate methods of securing able business 
management ? Taking men as we find them at present, 
this may well be doubted. 

§ 319. The main argument in favor of socialism has 
always been that it would secure a more just distribution 

of wealth than can possibly be brought about 
Socialism con- . 

sideredasa by competition. Socialists have no difficulty 
distribution ill showing that present methods fall far 
of wealth. short of securing satisfactory results in 
many cases. But they have not always agreed as to 
what constitutes justice in distribution. At present, 
however, socialists are inclined to hold that equality of 
income would secure at least approximate justice. 
Without discussing the principles of distribution accord- 
ing to merit, which were advanced by earlier socialists, 
it is sufficient to say that equality of income would be 
the only practicable plan in a socialistic regime. The 
difficulties of having public authorities decide whose 
merit or whose need is greatest, to say nothing of the 
difficulty of inducing the majority of the people to 
assent to such decisions, is a fatal weakness in any plan 
except that of equality in distribution. 

Now, from a social point of view, equality in distri- 
bution is not desirable. Some men have far greater 
natural abilities than others. Society suffers a seri- 



SOCIALISM. 609 

ous loss when a gifted person fails to secure the means 
of developing his special talents. For this reason it is 
socially desirable that people possessing 
superior faculties should have the means of distribution is 
gratifying them ; and this implies that they ^ ^^^^ ^' 
must receive more than less talented persons secure. 
Our present distribution of wealth may be fairly criti- 
cised because it fails to secure to many talented persons 
the means of developing their faculties, so that they 
may render the highest service to society. Bat socialism, 
with its plan for equality of income, would be still more 
objectionable.^ Finally, equality of income would be 
likely to remove that stimulus to invention and enter- 
prise to which we owe so much of our present economic 
progress. 

Socialists might conceivably secure an equal distribu- 
tion of social income by allotting to all individuals pre- 
cisely the same amounts of all kinds of jjiffj^^^ . 
commodities. But this would be an imprac- finding a value 
ticable arrangement, since all persons would under 
not want to secure exactly the same things. ^^*^^^^™' 
Accordingly socialists declare that equality of incomes 
should mean eg[uality of values. Then arises the question, 
How shall these values be determined and expressed ? 

1 Some socialists urge that, under socialism, production would be so 
large that all men would be able to gratify every rational desire. But 
nothing could be further from the truth. Our present production, if 
evenly distributed, could not do more than secure a comfortable, but 
frugal, living to all. Under socialism there is abundant reason to question 
whether production would be even as large as it is under our present 
system. 



610 PRINCIPLES OF ECONOMICS, 

Socialists say that value should depend upon the " aver* 
age labor time" required to produce a commodity. 
Each person should receive his income perhaps in the 
form of " labor checks " that should entitle him to goods 
representing so much labor time. We will grant that 
such a computation of the value of all commodities in 
terms of units of labor time has been made, although it 
would be possible to show that the differences between 
different grades of labor make it impossible to reduce 
all grades to terms of common unskilled labor. But, 
assuming that the labor unit is attainable, it could not 
work as a means of distributing incomes. For two 
goods may represent exactly the same amounts of labor, 
and yet one of them may be in much greater demand I 
among consumers. If both are procurable at the same 
price expressed in terms of labor time, then the supply 
of the most desirable one will be exhausted immediately. 
Supply and demand cannot be equalized by fixing 
prices on the basis of labor time. Market prices must 
depend upon the marginal utility of the products to con- 
sumers. It is impossible to see how supply and demand ! 
can be equalized except by changing prices. Labor time 
is an impossible unit in which to express values.^ 

§ 320. Socialism, therefore, has fatal weaknesses, 
Concluding whether considered as a scheme for the pro- 
considerations, duction or for the distribution of wealth. 
Those who favor it are often persons of the highest 



Eeform, 244-247 ; Hadlet, Economics, 93-96 ; ScHirFLE, Quintessence 
of Socialism, 77-89. 



SOCIALISM, 511 

character, who are influenced by the desire to remedy 
the admitted evils of our present system. They believe 
that socialism would have beneficial moral effects, and 
that it would favor the growth of many of the best and 
highest elements of our civilization. But, if socialism 

! is an impossible plan for the production and distribution 
of wealth, we shall have to reject it, although in many 
other respects it might offer an attractive programme. It 
may be well, furthermore, to suggest that socialism 

I would probably endanger liberty of thought and action 
in important respects. With all branches of production 
In the hands of the government, it would be difficult for 
any one to criticise the policy of the public authorities. 
Government officials would have extreme powers of 
annoying those who criticised their measures. It is 
doubtful whether a socialistic State would permit an 
agitation to be carried on against socialism, for instance. 
At present, people can find in private business a vantage 
ground from which they may freely criticise men and 
measures. Would a socialistic government furnish the 
paper, printing presses, postal facilities, and public halls 
necessary for free speech and public discussion hostile 
to itself ? In conclusion, it may be said that socialists 
have often shown themselves to be useful critics of the 
existing economic order. The student should weigh 
carefully the criticisms advanced by such writers. While 
he may have to reject their principal proposals, he should 
not overlook the useful portions of their writings. 

Few people, if any, would care to assert that existing 
methods of production are above criticism, or that our 



512 PRINCIPLES OF ECONOMICS, 

present methods of distribution secure exact justice. 

But this much can be affirmed : private enterprise has 

^^ . ..., been able to increase in a marked man- 

The justifica- 
tion of private ner the production of wealth, and holds out 

Sdfvidu^" ^ prospect of continued improvement ; the 
enterprise. present distribution of wealth has subserved 
fairly well the highest interests of our civilization, while 
the laborers, who make up the most numerous social 
class, have been able to improve constantly their posi- 
tion. Moreover, our present system secures reasonable 
opportunity for criticism and freedom for experimenta- 
tion ; so that it is possible to try to improve any features 
that are shown to be unsatisfactory. Rational criticism, 
enlightened public opinion, and resolute self-reliance in 
overcoming economic difficulties seem to offer the most 
practicable method of reforming and reshaping existing 
institutions. In some directions reform may best be 
secured by extending the activity of government. Such 
cases can be dealt with as they arise. We should feel 
glad to have socialists, or any other persons, point out 
the weak places of the existing economic order, or offer 
methods by which improvements can be effected. 



LITERATURE, ^V6 



I 



LITERATURE ON CHAPTER XYI. 

On Land Nationalization : Ely, Economics, 365, 366 ; GeorgEj 
Progress and Poverty ; Hadley, Economics, 469-474 ; Plehn, 
Public Finance, 106-109 ; Seligm an, Essays in Taxation, 64-94: 
Single Tax Debate, Journal of Social Science, XXVII. ; Walker, 
Political Economy, 407-433, Land and its Rent. 

On Socialism : Andrews, Institutes of Economics, 20-24 ; 
Bellamy, Looking Backward ; Bohm-Bawerk, Capital and In- 
terest, 315-392 ; Dawson, German Socialism and Ferdinand Las- 
salle ; Ely, Outlines of Economics, 308-315, French and German 
Socialism, Socialism and Social Reform ; Gide, Political Economy, 
398-469 ; Graham, Socialism, New and Old ; Gronlund, The 
Cooperative Commonwealth ; Kirkup, Inquiry into Socialism, 
History of Socialism ; Laveleye, Socialism of To-day ; Marx, 
Capital ; Mill, Principles of Political Economy, Book 11. Chaps. 1, 
2, and 3 ; Morley, Ideal Commonwealths ; Rae, Contemporary 
Socialism ; Roscher, Political Economy, I. 235-267 ; Schaffle, 
The Quintessence of Socialism ; Walker, Political Economy, 517- 
524 ; WooLSEY, Communism and Socialism. 



33 



^14 PRINCIPLES OF ECONOMICS. 



CHAPTER XVII. 

THE ECONOMIC FUNCTIONS OF GOVERNMENT. 

I. Economic Functions Performed by Governments. 

§ 321 . Many times in the preceding chapters it has 
been necessary to explain that the government plays an 
Importance important part in our economic life, or to 
action of discuss the advisability of having the gov*- 
governments. ernment perform some economic function 
rather than leave it to private enterprise. Most prac- 
tical economic questions involve directly or indirectly the 
question of governmental activity in economic affairs. 
This subject cannot be avoided by the economist, even 
if he desires to do so, and it will be desirable to con- 
sider this topic at this point before commencing the 
study of public expenditures and revenues. 
The economic § ^22. It will be well to summarize the 

function actu- y^rious economic functions which we have 
ally performed 

by government, found to be exercised by governments at 

the present time. 

First, governments aim* to protect persons and to 

maintain order. Then they define and protect the 
Fundamental i^ig^ts of property and contract. Personal 
rights. freedom, private property, and the right of 

contract are fundamental elements in our economic life. 



ECONOMIC FUNCTIONS OF GOVERNMENTS. 515 

In order to secure the best results in industrial life, 
modern governments guarantee individuals the enjoy- 
ment of certain privileges. Patent rights, Guaranteed 
trade-marks, and copyrights are privileges P^^viieges. 
granted in order to stimulate the general activity of the 
people. Moreover, governments allow individuals to 
enjoy much freedom in the establishment of industries. 
This privilege is restricted when the government as- 
sumes the management of any enterprise, or regulates 
the conditions upon which individuals may carry on 
any business. 

In the third place, the government regulates the terms 

of competition in some cases where evil results would be 

produced on account of the unequal strength Regulation or 

of different individuals. Laws reffulatino; equaUzationof 

° ° the terms of 

the labor contract, regulating rates of inter- competition. 

est, regulating freight rates, or providing for the inspec- 
tion of food products, are examples. These laws limit 
nominal freedom, but may increase the real freedom of 
individuals in many cases. 

Oftentimes governments participate in private enter- 
prises. Such participation occurs when subsidies or 
bounties are bestowed by the government on Participation 
private enterprises. These have taken the f fi^oyemment 

^ / ^ in private 

form of gifts of land and money, as in the enterprises. 

United States, where millions of acres of land and mil- 
lions of dollars of money have been given to aid railroads. 
Sometimes the subsidy may take the form of a loan. Pro- 
tective duties are another case where the government 
gives aid to private enterprises. Again, for works of a 



516 PRINCIPLES OF ECONOMICS. 

semi-public character, in which private enterprises must 
use public streets, or must secure a right of way through 
private property, the government grants franchises to 
individuals. 

Finally, governments carry on many useful public 
works, designed wholly or in part to promote industry. 
Roads, sewers, parks, harbor improvements, 
tion of usef td consular services, collections of statistics, 
public works, jigh^houses, dikes, coinage of money, sanitary 
provisions, educational facilities, postal facilities, water 
works, gas and electric lighting works, street and steam 
railways, and telegraph and express facilities are impor- 
tant examples. Some of these enterprises could not or 
would not be carried on by private individuals, because 
the benefit to the public is intangible or indefinite, and 
no sufficient return could be secured. Others might be 
left to private enterprise, and actually are conducted by 
private individuals in many cases. 

§ 323. Prior to the present century, the governments 

of Europe had long endeavored to control nearly all 

_, . ^ branches of economic activity in an extreme 

Old and mod- '' 

ern views of degree.^ This was done from the theory 

functions of that private enterprise is unable to accom- 

government. p^^gjj many things that society needs to have 

done, or from the theory that there is a necessary 

antagonism between private and public interests. Thus 

it was thought, in the first case, that a nation could 

1 Nearly the same thing was true in most of the American colonies. 
The economic life of the people, as well as their social and moral, was 
thought to need continual regulation. 



ECONOMIC FUNCTIONS OF GOVERNMENTS. 517 

secure a sufficient stock of money only by regulating 
foreign commerce so as to make exports exceed imports 
continually. In the second case, it was believed that 
business men are likely to make their profits at the 
expense of the community, and that restrictive laws are 
necessary to prevent this.^ 

In the year 1776 Adam Smith published his " Wealth 
of Nations," combating vigorously the restrictive policy 
of European governments. He showed that ^dam smith's 
private individuals could acquire large profits ^^^^^s. 
by supplying some real social need ; and that men, in 
pursuing their own personal interests, were commonly 
increasing the wealth of the society. Moreover, he 
proved that many of the restrictions placed upon private 
enterprise resulted, not in furthering social interests, but 
in preventing men from serving each other. He argued 
most ably that the desire of men to promote their indi- 
vidual interests, by establishing business enterprises and 
trading with their fellows, would usually produce results 
beneficial to society. He urged that the true way for a 
nation to become rich is to leave its citizens free to con- 
duct business as they desire. 

Partly through the influence of Adam Smith, partly 
through other causes, modern thought has favored the 
view that individuals, in seeking their own economic 
interests, are regularly promoting the welfare of society. 

1 These theories form a body of economic doctrines known as mercan- 
tilism. They have sometimes been condemned too absolutely by modern 
economists. See Schmollee, The Mercantile System (edited by Ashley), 
for a more favorable view of mercantilism. 



518 PRINCIPLES OF ECONOMICS, 

For this reason many of the old restrictions upon the 

establishment of industries, upon foreign commerce, 

upon the movements of money, upon the rela- 

Modern . „ , J •> ir 

views of tions of laborers and employers, were abol- 

f^ctions!"*^ ished during the first half of the present 

"Laissez century. Many people were led to the belief 

that government should have as little to 

do with economic matters as possible ; and held that 

" Laissez faire^ laissez passer y^ or " leave things free to 

take their own course," expresses the policy that should 

be followed. 

But the old restrictions upon industry were no sooner 

removed than people felt obliged to resort once more to 

. . governmental action to remedy disorders 
Reaction from ° '' 

the "Laissez which were found to exist in modern eco- 
° ^^' nomic life. Factory acts and laws regulating 
corporations are instances of such action. More recently 
governments have begun to assume the management 
of enterprises that are natural monopolies, while the 
demand is made that more industries shall be brought 
under governmental control or ownership. This raises 
one of the most pressing economic problems. 

II. Examination of Modern Theories of Governmental 
Functions. 

§ 324. To the question of the proper policy for 
Difference government to follow in respect to industry, 
?1^1^^ many different ans\^efs are ffiven. It will 

on tnis gues* •' ° 

tion. be helpful to classify the various views 

advanced. 



THEORIES OF GOVERNMENTAL FUNCTIONS. 519 

§ 325. Here, as elsewhere, the anarchists answer that 
government means control, and control is evil, in and of 

itself ; so that the only proper policy is to 

' , . , Anarchism, 

abolish all government, and to leave indus- 
try to the voluntary actions of individuals. But no 
anarchist has ever been able to picture a society organ- 
ized without any control of one person by others. For 
all anarchists admit the necessity of securing common 
action by groups, or voluntary associations ; and when- 
ever conflicts of interest should arise between groups, 
the stronger must control the weaker. Therefore 
anarchism is as illogical as jt is impossible. 

§ 326. Extreme individualists resemble the anarchists 
in considering government an evil. But they regard it 
as a necessary evil; necessary because of the Extreme in- 

imperfections in man's moral nature. Men dividuaUsm 
^ tased upon 

should be left free to do as they please, so "natural 

long as they do not interfere with the equal "^ 
rights of others. Government should do nothing ex- 
cept prevent such interference by one person with the 
equal rights of others. If men ever become moral 
enough to refrain from molesting each other, government 
will no longer be necessary. For the present, govern- 
ment should protect persons and property, and enforce 
contracts voluntarily made by sane adults. Beyond 
these " police powers " no wise government should go. 
Extreme individualism is said to be based criticism of 

upon the "natural rights" of man. The extreme indi- 

^ , . p T vidualism. 

principle • that " every man is free to do 

that which he wills, provided he infringes not the equal 



520 PRINCIPLES OF ECONOMICS. 

freedom of any other man " is said to be a revelation of 
what is naturally right. But men's ideas of what is nat- 
urally right differ so widely that most people have come 
to distrust the reliability of such revelations. Nearly all 
competent writers agree that our notions of rights are 
based upon considerations of the good or evil effects of 
our actions on society, that is, upon social utility. As- 
serting that a thing is a natural right is merely one 
way of advancing a personal opinion of what is socially 
desirable, without supporting the claim by arguments. 
Therefore we conclude that extreme individualism can 
be defended solely by showing that it leads to the best 
results when put into practice. Now, as a matter of 
fact, nobody has ever been able to put it into actual 
practice ; and we are justified in claiming that it is an 
impossible theory of governmental action. 

§ 32T. Most individualists have recognized that the 
rights of individuals and the functions of government 
Individualism can be determined solely by considering 
gener^^wei- ^ what is most useful to society. Most econo- 
fare of society, j^igts at the present day hold such a view. 
They believe that the general good of society is the 
end of all economic organization, and that government 
should extend its functions into any field of economic 
activity where the best results can be secured from such 
a policy. But they believe that in most cases the gen- 
eral welfare is best promoted by leaving to the individ- 
ual a large measure of freedom. They believe in indi- 
vidual enterprise as the rule for economic activity, but 
favor governmental action whenever it can secure bet- 



THEORIES OF GOVERNMENTAL FUNCTIONS. 521 

ter results in the long run. Views of this sort can be 
characterized as moderate individualism. They are well 
stated by Mr. Mill in the following words : — 

" But enough has been said to show that the admitted 
functions of government embrace a much wider field 
than can easily be included within the ring-fence of 
any restrictive definition, and that it is hardly possible 
to find any ground of justification common to them all, 
except the comprehensive one of general expediency; 
nor to limit the interference of government by any uni- 
versal rule, save the simple and vague one, that it 
should never be admitted but when the case of expe- 
diency is strong." 

Individualists of this class support their claim that 
individual freedom leads to the best results in most 
cases by the following arguments : — Detailed 

1, They urge that private individuals are siderations of 

, , the argniments 

likely to know their best interests better ©f indi^duai- 

than the government can know them, and ^^^' 

that there is usually no antagonism between private and 

social interests. Whenever this is found not to hold 

true, governmental action is proper. Many cases can 

be enumerated in which individuals do not know their 

true interests, while in many instances there may be a 

I direct opposition between private interest and public 

I welfare. But individualists hold rightly that the rule 

is the other way. 

2. Individualists argue that a private entrepreneur 
has a greater personal interest in the success of his 
undertaking than government officials often feel in pub 



522 PRINCIPLES OF ECONOMICS. 

lie enterprises. Furthermore, corrupt administration is 
liable to creep into public affairs. This argument is 
easily exaggerated, and it is to be expected that im- 
proved political methods may continually decrease the 
abuses of public administration. Yet something must 
be conceded to the stronger interest and greater in- 
ducements to efficiency experienced in much private 
industry. 

3. Individualists notice that when governments carry 
on business undertakings, they may fall back upon taxa- 
tion as a means of making up possible deficits. If a 
private enterprise is poorly managed, the undertaker 
will incur constant loss, and will he driven out of busi- 
ness finally. But government enterprises, if badly ad- 
ministered, may fall back upon taxation, in some fori 
or other, to make up the deficits. Hence an inefficient 
public undertaking which incurs constant loss may nol 
be eliminated from the field of industry, as is the case 
with private enterprises. 

4. Finally, individualists believe that freedom in ecoi 
nomic affairs has a great educational influence upon th( 
people of a country. The experience of private busi^ 
ness management often furnishes a valuable training ii 
many important directions. Moreover, it is highly de- 
sirable that a people should be vigorously self-reliant, 
and should not be habitually dependent upon govern- 
mental action in too many things. Two quotations 
from Mr. Mill will serve to emphasize these points: 
"A people among whom there is no habit of sponta- 
neous action for a collective interest, who look habit* 



THEORIES OF GOVERNMENTAL FUNCTIONS. 523 

ually to their government to command or prompt them 
in all matters of joint concern — who expect to have 
everything done for them, except what can be made an 
affair of mere habit and routine — have their faculties 
only half developed ; their education is defective in one 
of its most important branches." "It is therefore of 
supreme importance that all classes of the community, 
down to the lowest, should have much to do for them- 
selves ; that as great a demand should be made upon 
their intelligence and virtue as it is in any respect equal 
to ; that the government should not only leave as far as 
possible to their own faculties the conduct of whatever 
concerns themselves alone, but should suffer them, or 
rather encourage them, to manage as many as possible 
of their joint concerns by voluntary cooperation ; since 
this discussion and management of collective interests 
is the great school of that public spirit, and the great 
source of that intelligence of public affairs, which are 
always regarded as the distinctive character of the 
public of free countries." 

Among the economists who might be called individ- 
ualists of this class there are considerable differences 
concerning the exact extent of the functions Differences 
that they desire to see exercised by govern- Ij^^J^ 
ment. Some of them approve of govern- i^dividuausts. 
mental action in many more cases than others. A 
second point of difference is found in the terms used to 
describe governmental action. Those who are inclined 
to restrict it often refer to " governmental interference 
in industry >" and speak of it as a necessary evil rather 



524 PRINCIPLES OF ECONOMICS. 

than a positive good. On the other hand, those econ- 
omists who favor a certain extension of State activity, 
do not hesitate to affirm that government is a necessary 
and beneficent factor in economic as in other depart- 
ments of social life. 

§ 328. The views held by socialists concerning the 
functions of government do not need detailed discussion 
The views of ^^^^ ^^^^^ chapter. In general, socialists hold 
the sociaUsts. \]^2iX> individual freedom and enterprise in 
economic affairs usually lead to harmful results, so 
that the socializing of all branches of industry is the true 
policy for the government to pursue. Socialists aim at 
the same end that the second class of individualists 
have in view, the general good of society. They differ 
from the individualists in the methods of securing their 
desired end. 

III. The Several Functions of Government Considered from 
the Point of View of Individualism. 

§ 329. The author's belief has been that individualists 
are right in affirming that, in most economic affairs, 
Point of view individual enterprise and freedom secure 
of this work, results that are most beneficial to society. 
But, in those cases where individual enterprise is impos- 
sible, or where freedom produces evil results that can 
be obviated by social action, there is a large and 
important field where governmental activity is bene 
ficent. Governments should be viewed, therefore, as a 
useful and necessary agency for accomplishing purposes 
for which individual freedom or initiative is inade- 



THEORIES OF GOVERNMENTAL FUNCTIONS. 525 

quate. From this point of view it is proposed to 
examine briefly the differences of opinion existing 
among individualists concerning each class of functions 
exercised bv governments. 

§ 330. In our classification of the economic functions 
of government, the definition and enforcement of the 
rights of persons, property, and contract 

1 lie iiirsT ciflss 

were placed first. Economists agree con- of governmen- 
cerning the utility of these functions of °^' 

government. It will appear, however, in the following 
paragraphs that there are differences of opinion in 
regard to the extent to which property and contract 
rights should be recognized. 

§ 331. Concerning the general expediency of govern- 
mental grants of such privileges as patents, trade-marks, 
and copyrights, economists are substan- xhe second 
tially agreed. Yet a very large number of class of 
writers have called attention to abuses con- 
nected with these rights, and have desired a more careful 
definition or restriction of such privileges. General 
freedom in the establishment of industries is not called 
in question except in special cases. These exceptions 
are, firsts industries where it is important that persons 
entering them should have an adequate preparation, 
such as professions and skilled trades ; and second^ 
natural monopolies where attempted competition results 
in needless duplication of plants. 

§ 332. Few will deny that government should equal- 
ize the terms of competition, when there is very serious 
inequality between the contracting parties, and when it 



526 PRINCIPLES OF ECONOMICS. 

is clear that governmental regulation will remove the 
evils that arise from such inequality. Economists hold 
The tMrd class different views concerning the expediency 
of functions, of some legislation in regulation of com- 
petition, because they differ as to the extent of the 
inequalities between the two parties, or because they 
doubt the efficiency of the remedies proposed, or because 
they believe that the contemplated restrictions will have 
worse social effects than the evils which it is desired to 
cure. Wise factory legislation and a reasonable control 
of railroads and local monopolies are favored by most 
economists. 

§ 333. Economists are not inclined to favor bounties, 
subsidies, and protective duties. Such measures mean 
aiding some industries at the expense of all 
class of taxpayers or consumers. This can be justi- 

fied only when the public necessity or social 
utility of the favored industry is extremely great. More- 
over, such a policy tends to corrupt politics, and to 
produce many abuses. On the other hand, many busi- 
ness men who stoutly oppose governmental regulation 
of corporations, of the labor contract, or of freight rates, 
on the ground that government ought not to meddle 
with private business, are very willing to favor bounties, 
subsidies to railroads, and protective duties. Concerning 
the question of franchises, it may be said that economists 
hold that valuable privileges of this sort should be paid 
for by the individuals who receive them, while the 
public should be guaranteed good service at reasonable 
rates. 






THEORIES OF GOVERNMENTAL FUNCTIONS, 527 

§ 334. The last class of governmental functions 
includes, as was shown, two fairly separate classes of 
useful public works. Roads, sewers, harbor The fifth class 
improvements, the publication of statistics, of factions, 
the maintenance of light-houses and dikes, the coinage 
of money? sanitary precautions, and public education 
are undertakings in which private enterprise has been 
proven to be inadequate or productive of bad results. 
No one but anarchists and extreme individualists would 
object to the policy of our present government in pro- 
viding these public works. But there is a doubt as to 
the expediency of having the government undertake 
other works that might conceivably be left to private 
enterprise. 

It is said that the gas and electric light industries, 
steam and street railroads, and the telegraph and ex- 
press businesses are suitable fields for private Governmental 
enterprise, and that governments should industrial 
not interfere with them. The student will tmdertakings. 
understand that the question of the advisability of pub- 
lic or private management of these industries is solely a 
question of social utility. This will be made clear by con- 
sidering that many people who oppose public ownership of 
these enterprises favor the national ownership of the post 
office and municipal ownership of water works. Those 
who favor public enterprise in these fields do so because 
experience has shown that all these industries inevitably 
become monopolies, and they prefer public to private 
monopoly. Those who oppose such a policy must admit 
the tendency to monopoly in these lines of business, and 



528 PRINCIPLES OF ECONOMICS. 

must show that private management, either with oi 
without governmental control, can assure the best re- 
sults to society. As a matter of fact, all arguments 
consciously or unconsciously come to precisely this posi- 
tion sooner or later. 



LITERATUEE ON CHAPTER XVII. 

General References : Andrews, Institutes of Economics, 14-22 j 
Adams, Relation of ttie State to Industrial Action ; Bastable, 
Public Finance, 37-53 ; Cairnes, Essays on Political Economy, 
232-264 ; Ely, Economics, 249-307, Socialism and Social Reform, 
253-354 ; Farrer, The State in its relation to Trade ; Hadley, 
Economics, 8-23, 390-403 ; Hoffman, The Sphere of the State ; 
Jevons, The State in its relation to Labour ; Mill, Principles of 
Political Economy, Book V. Chaps. 1 and 11, On Liberty; Sidg- 
wiCK, Political Economy, 404-497, Elements of Politics, Chaps. 
4, 9, 10 ; Smith, Wealth of Nations, Book IV. Chap. 9, end of 
chapter, Book Y. Chap. 1, especially Part III.; Willoughby, The 
Nature of the State, 309-350 ; Wilson, The State, 637-668. 

References on Extreme Individualism: Donisthorpe, Indi- 
vidualism, A System of Politics ; Mackay, A Plea for Liberty, A 
Policy of Free Exchange ; Spencer, The Man versus the State; 
Sumner, What Social Classes Owe Each Other. 

References to Discussion of Doctrines of Economists : 
CoHN, History of Political Economy; Cossa, Introduction to 
the Study of Political Economy; Ingram, History of Political 
Economy. 



■:'i 

I 



PUBLIC EXPENDITURES. 529 



CHAPTER XVIII. 

GOVERNMENTAL EXPENDITURES AND REVENUES. 

i I. Public Expenditures. 

I § 335. In order that governments may exercise the 
functions that have just been described, it is necessary 
that they should be able to command the 
men and the commodities that are con- 
stantly required for the public service. In modern 
countries governments supply these needs by collecting 
sums of money that can be used for hiring public offi- 
cials and purchasing commodities. The economist is 
obliged to study with care the manner in which personal 
services or material objects are thus secured for the 
satisfaction of the public, or collective, wants of society. 
This branch of study is of such importance that it has 
often been accorded almost the position of an indepen- 
dent science, and the name Public Finance has been ap- 
plied to that department of economic investigation which 
deals with governmental expenditures and revenues. 

§ 336. The objects of governmental expenditure are 
so multifarious that it is extremely difficult to group 
them in a simple and logical classification, ^, .,. ^. 

^ ° ' Classification 

but a brief survey of the various functions of pubUc ex- 
enumerated in the last chapter will indicate '*®"'^*^®^- 
the chief items of public expense. In the limited space 

34 



530 PRINCIPLES OF ECONOMICS. 

at our disposal it will be advisable to attempt nothing 
more in the way of general classification, and to devote 
our attention to the expenditures of our national, state, 
and local governments in the United States. 
„ , , ^ In 1890 the federal census stated the 

Total expend- 
itures in the total expenditures of our national, state, and 
United states. . . , j. n 

local governments as loliows : — 



National government, including postal service . , 

States and territories, except for public common 

schools ... 


$352,218,614 

77,105,911 
114,575,401 

232,988,592 
139,065.537 


Counties, except for public common schools , . 
Municipalities, except for public common schools 

Public common schools 

Total 


$915,954,055 





It will be seen that the expenditures of the federal 
government formed thirty-nine per cent of the total, 
and that those of the states and territories amounted 
to only nine per cent ; while local expenditures, includ- 
ing those for public schools, made up fifty-two per cent 
of the total cost of government. In 1850, the expenses 
for national purposes amounted to forty-nine per cent of 
the total outlay, and it is evident that there has been 
a marked increase since that time in the demands which 
local governments have made upon the public resources. 
The same tendency can be observed in other countries, 
and such a preponderance of local expenditures is due 
to the increasing number and cost of the services which 
the local political units render to their citizens. The 
states occupy a position of relatively minor financial 
importance ; but, in some cases, there has been a marked 



I 



PUBLIC EXPENDITURES. 531 

increase in their expenditures in recent years. Thus, in 
New York, the state government expended $13,076,881 
in 1890, and $20,020,022 in 1898. This increase has 
been due to the assumption of new branches of public 
administration, such as the care of the insane ; and 
other states are manifesting a disposition to enlarge 
their spheres of activity. 

During the fiscal year 1905, the net ex- Federal ex- 
penditures of our federal government were p^^^^^^s. 
as follows : — 



Interest on public debt 

Pensions 

Departments of War and Navy i 

Deficiency of postal revenue and other postal 

expenses i . . . . 

All other expenses 

Total^ . . . . ' 



$24,590,794 
141,773,965 
219,986,027 

17,284,522 
163,643,605 



$567,278,913 



During this year the Post Office Department spent 
$170,111,107, but $152,826,585 of this amount was met by 
the postal revenues. Only the deficiency of $17,284,522 
is included in this statement of the net expenditures. 
The first three items in our table represent almost en- 
tirely our expenses for military purposes, past and pres- 
ent,3 and they amount in the aggregate to $403,635,308. 

1 This is exclusive of $22,813,865 expended under the War Depart- 
ment for improvement of rivers and harbors. This sum is included in 
the last item of the table. 

2 In 1897, the last year before the Spanish War, the aggregate net 
expenditures were $365,774,159. In 1905 the expenditures were 55 per 
cent larger. 

^ Of course a part of the public debt has been contracted in recent 
years for other than military expenses, and the interest thus accruing 



532 PRINCIPLES OF ECONOMICS. 

This is more than twice the total expenditures of the 
federal government for all other purposes.^ The amount 
paid in 1905 for pensions alone was greater than the 
entire cost of our public schools in the year 1890. 
Reckless pension legislation has increased the outlays 
for this purpose from 156,102,000 in the year 1885 to 
1141,773,000 in 1905. The last item in our table repre- 
sents the expense of administering justice, improving 
rivers and harbors, maintaining Congress and the presi- 
dent, and conducting the departments of the Treasury, 
Interior, State, Justice, and Agriculture. 

In 1890 the total expenditure of the state and local 

governments was placed by the census at about 

state and local 8569,000,000. The principal objects of ex- 

expenditures. pgjjge ^ffQYQ aS follows : — 



All educational purposes . 

Roads, bridges, and sewers 

Construction and maintenance of public buildings 

and works 

Interest on public debt 

Charities and gratuities 

Police 

Judicial expenses <> . 

Fire. 

Penal and reformatory institutions 

Lighting . 



$145,583,115 

72,262,023 

52,463,197 
46,649,139 
39,958,816 
23,934,376 
18,721,383 
16,423,820 
12,381,425 
11,363,780 



should be deducted from any estimate of military outlays. Also the ex- 
penditures attributed to the War and Navy Departments include some 
minor items that are not military expenses. But it is not possible to 
separate these from the other expenses of those departments. 

1 In this respect the United States does not differ from other countries, 
for a very large proportion of national expenditures is everywhere re 
quired for military purposes or for interest on public debts contractec 
principally for the prosecution of wars. 



PUBLIC EXPENDITURES. 583 

The student can most advantageously supplement these 
general data taken from the federal census, by a study 
of the financial reports of his town, county, or state. 
Indeed, such investigation should accompany class-room 
work with both public expenditures and public revenues. 
§ 337. In all countries governmental expenditures are 
increasing in a marked degree. Between 1830 and 1890, 
tlie national expenditures of the various 

^ The growth of 

states of Europe rose from four to eleven public ex- 
dollars per capita, and the rate of growth ^" ^^' 
was even more rapid in the later than in the earlier 
decades of that period. In the United States federal 
expenditures rose from 11.42 to |6. 81 per capita 
between 1840 and 1905, and the budgets of our local 
political units have shown a constant tendency to 
increase. 

This world-wide phenomenon has been viewed with 
great alarm by many persons, who have attributed it 
to profusion or corruption in governmental 
affairs. But two considerations need to be 
borne in mind by the student of financial problems. 
First, even if per capita expenditures have become 
larger, it is certain that wealth also has increased ; so 
that the greater public outlay may not represent an in- 
creased burden relatively to the resources of the people. 
In the United States, at any rate, it is quite probable 
that such has been the case. In the second place it is 
certain that the larger expenditures are, in considerable 
measure, the result of an enlargement of the functions 
that governments have been called upon to perform. 



534 PRINCIPLES OF ECONOMICS. 

This fact can be most clearly seen in the case of local 
expenditures, where the increase has been very marked. 
Nevertheless it cannot be denied that probably all gov- 
ernments are imposing upon their citizens heavier bur- 
dens than would be required under a wiser or more 
honest management of public affairs. 



II. Public Revenues. 

§ 338. Public revenues are as difficult to classify as 

public expenditures have proved to be,^ but it will 

Classification suffice for our present purpose to recognize 

ofpuDHcrev- r r r o 

enues. six main branches of income. 

§ 339. The first branch of income includes revenues 

derived from domains and industries. Public domains 

I. Revenue ^^'^ lands that are retained in the posses- 

from domains gj^^ ^f ^\^q government. Many European 

dustries. states possess agricultural lands that are 

cultivated under public management or leased to 

citizens. Mines, also, sometimes form a part of the 

domain, and are operated in a similar manner; while 

the need of a careful husbanding of forest resources 

has led to the public ownership and management of 

forests. In some of the states of the German Empire 

the income from domains and forests forms from seven 

to fifteen per cent of the total revenues. In the United 

States a different policy has been followed. Our federal 

1 For the most recent suggestions upon the subject see Seligman, 
Essays in Taxation, 265-304 ; Plehn, Public Finance, 69-82 ; Adams, 
Science of Finance, 219-229; Hadley, Economics, 447-449. 



PUBLIC REVENUES. 535 

government has possessed an enormous public domain 
(§ 7), but .this has been allowed to pass largely into 
private ownership, upon the theory that the resources 
of the country would be most rapidly developed in this 
way. Receipts from the sale of public lands now form 
but an insignificant item in the federal revenues. 

Governments conduct many kinds of public industries, 
such as water works, gas and electric-lighting plants, 
street and steam railways, and postal and Putuc indus- 
telegraph systems. In some cases these ^^®- 
are operated at a loss, as is the case with the postal 
service of the United States, where there is an annual 
deficit of ten or twelve million dollars (§ 336). In 
other instances a profit is derived from these industries, 
as in Prussia, where the railroads yield a surplus of 
about 180,000,000 annually, or in England, France, and 
Germany, where a substantial net revenue is secured 
from the post office. In general it may be said that 
these industries were not brought under public man- 
agement primarily for the sake of revenue, since vari- 
ous social or political considerations contributed to bring 
about this result. Sometimes it was desired to avoid 
the evils of private monopoly, at others the purpose 
was to extend the facilities offered by these industries 
more widely than private enterprise could or would 
do. When it has seemed desirable to encourage the 
widest possible use of any of these commodities or 
services, all thought of revenue has been deliberately 
renounced, and the prices exacted have been reduced 
to the lowest possible figure. This is true of the water 



536 PRINCIPLES OF ECONOMICS, 

supply of large cities and of the postal service in tlie 
United States. In general there is a strong tendency 
on the part of the public to demand lower charges 
rather than a large revenue from these undertakings. 
In a few cases governments conduct business under- 
takings purely as a means of raising revenues. Such 
Fiscal mon- enterprises are called fiscal monopolies, and 
opoUes. 2iVQ found in some countries of Europe. 

Thus France monopolizes the manufacture of tobacco, 
and endeavors to derive from this source the largest 
possible monopoly profits. This, however, is merely 
a substitute for internal taxes upon tobacco, which, it 
was found, could not be made equally effective as a 
source of revenue. In such cases, therefore, we are 
dealing with what is really a form of taxation. 

In many American towns and cities the work ol 
supplying the people with water, transportation, and 
semi-pubUc in- lighting facilities has been left to private 
dustries. corporations, which have been given fran- 

chises to use the streets in the conduct of their enter- 
prises. All of these industries, we have seen (§ 204), 
are certain to prove natural monopolies; and, as a 
rule, are likely to become very profitable. Moreover, 
they are virtually performing a public function, which 
the municipality concedes to them instead of reserving 
to itself. In all such cases, therefore, the same ques- 
tions arise that confront any government when it un- 
dertakes a similar enterprise : Shall a large revenue 
be secured by requiring the private corporations to 
make adequate payment for the valuable franchises 



PUBLIC REVENUES. 537 

granted to them ; or shall the companies be compelled 
to fix prices at a low rate that will encourage the widest 
possible use of the services supplied ? In the past, 
American municipalities have failed to attain either 
of these ends, and have given away franchises without 
exacting any adequate return for the privilege of ex- 
ercising these semi-public functions. Such a policy 
amounts to a shameful squandering of public resources. 
If a wiser course is followed in the future, our cities 
can defray a large part of their expenses out of the 
receipts from public franchises. 

§ 340. Fees constitute a second form of public rev- 
enue. Governments are constantly performing many 
services for particular individuals who re- 
ceive thereby a special benefit. It is con- 
sidered just to demand from such citizens the payment 
of a part or the whole of the expense which is incurred 
in the performance of such services, and fees are 
charged upon such occasions. We may, therefore, 
define a fee as '' a payment to defray the cost of each 
recurring service undertaken by the government pri- 
marily in the public interest, but conferring a measur- 
able special advantage on the fee-payer." ^ Probate 
fees, court charges, fees for recording deeds and mort- 
gages or for issuing marriage licenses, are common 
examples of this form of public revenue. If the sums 
exacted exceed the cost of performing the service, 
then the surplus over the cost is theoretically a tax 
upon a special class of persons, viz.: those who are 

1 Seligman, Essays in Taxation, 304. 



538 PRINCIPLES OF ECONOMICS. 

called upon to pay the fees. In practice, however, 
revenues of this class are called fees irrespective of 
the precise relation between the alnount collected and 
the cost of the service. 

§ 341. A third branch of revenue comprises receipts 
of a very miscellaneous character. Fines and penal- 

3. MisceUane- ^^^^ form a small item of income. Some- 
ous revenues, times property reverts to the government 

upon the failure of heirs. In a number of countries 
public lotteries are still maintained, and are made to 
yield considerable income. In 1901 Italy secured 
about 113,500,000 from this source. Finally, govern- 
ments are occasionally the recipients of gifts. These 
usually are for some specific purpose, as a park, a 
library, or a schoolhouse, and do not form a part of 
the general public revenues. 

§ 342. A fourth form of revenue has become very 
important in the finances of American municipalities, 

4. Special as- b^^t has been less often utilized in other 
sessments. countries. This is the special assessment, 

which may be defined as ^ "a compulsory contribution, 
levied in proportion to tlie special benefits derived, to 
defray the cost of a specific improvement to property 
undertaken in the public interest." When new streets 
are opened or old ones are paved, when drains and sewers 
are constructed, or when public squares or parks are 
laid out, the owners of adjoining real estate, which is 
enhanced in value as a result of such improvements, may 
justly be called upon to pay a part or even the whole of 

1 Seligman, Essays in Taxation, 283. 



PUBLIC REVENUES. 539 

the cost of such public works. The entire community 
may be interested in such improvements ; and, accord- 
ingly, commonly defrays a part of the expense out of its 
general revenues. But the owners of abutting real 
estate derive a special, measurable benefit from such 
public works, and should in justice bear a part of the 
burden thus incurred. Special assessments have become 
an important and probably a permanent feature of 
American municipal finance, since they have proved 
well adapted to the needs of young and rapidly growing 
cities. In 1903 the statistics of one hundred and 
seventy-five cities showed that receipts from special as- 
sessments amounted to 133,845,000, which was slightly 
more than ten per cent of the sums raised by general 
taxes for that year. 

§ 343. Public loans must be included in any state- 
ment of the forms of governmental revenue. Of course 
the receipts secured by public borrowing 5^ -^vimc 
are of a temporary character, and carry with ^°^^* 
them the necessity of ultimate repayment. But genera- 
tions and even centuries sometimes elapse before such 
debts are extinguished, so that loans may assume a rela- 
tively permanent character. The forms of public bor- 
rowing are many, and it will be possible to mention here 
only those which are of most importance in the United 
States. Treasury notes are often issued to meet tem- 
porary deficits. These notes are to remain outstanding 
until they can be redeemed out of the proceeds of cur- 
rent taxes or from the sale of bonds. Government 
bonds are obligations that run for a term of years, 



540 PRINCIPLES OF ECONOMICS, 

being redeemable at a certain fixed date. They meet 
the demands of lenders who desire to secure a relatively 
permanent investment. When such bonds mature, they 
are often re-funded, i. e. redeemed by contracting new 
loans, frequently at a lower rate of interest. Finally, 
governments may contract forced loans by issuing a 
paper currency, as was done during our Civil War. By 
this means the property of citizens is seized and applied 
to the public service. It is said that governments may 
advantageously borrow in this manner without having 
to pay interest upon their debt. But any possible sav- 
ing in this direction is many times outweighed by the 
disastrous results of a paper-money policy (§ 158). 

Public loans are contracted for various purposes. In 

cases of great emergency, as, for instance, the outbreak 

The objects of a war, governments have resorted to 

for wMcii borrowing in order to secure the large sums 
loans are con- » & 

tracted. that are suddenly demanded. Such a course 

throws the immediate burdens upon the people who in- 
vest in public securities, and taxpayers are for the time 
being relieved. The ultimate burdens devolve upon 
future taxpayers, who are called upon to supply the 
funds required for paying the principal and interest of 
the debt. A second occasion for borrowing arises when 
some public work is to be undertaken or a public indus- 
try is to be established. For these purposes funds can 
be secured most easily by borrowing, since great hard- 
ships would arise from the attempt to raise all the nec- 
essary money by current taxation. In case the proceeds 
of the loans are invested in some productive industry 



PUBLIC REVENUES. 541 

that will yield a clear income sufficient to pay both in- 
terest and principal, the debt contracted is offset by 
valuable assets, and forms no real burden. With all 
other public works, which yield either no money income 
or less than is sufficient to make complete provision for 
the debt, it is highly important to remember that such 
undertakings constitute a real financial burden, even 
though they are plainly seen to be beneficial to society 
in the highest degree. Finally, governments have re- 
sorted to borrowing when the existing taxation has failed 
to supply the funds needed for current expenditures. 
When such a deficit is due to accidental and temporary 
causes, the loans thus contracted may be repaid out of 
the surplus revenues of subsequent years, and no harm 
may be done. But sometimes governments have con- 
tinued to make up recurrent deficits by means of con- 
tinued borrowing. Such a policy merely postpones the 
evil day when either bankruptcy or heavy increases of 
taxation will become inevitable, and throws upon the 
future a burden that ought to be borne by the present. 

§ 344. Taxes constitute the final and most important 
branch of public revenue. They may be defined as 
compulsory contributions exacted by govern- 6. Taxes, 
ments from persons within their jurisdictions, for the 
purpose of defraying general public expenses. The at- 
tention of the student should be called to the important 
points of difference between taxes and some of the forms 
of revenue previously described. It was seen that a fee 
is exacted only from persons for whom the government 
performs some special service, and that special assess- 



542 PRINCIPLES OF ECONOMICS. 

merits are collected from people whose property has been 
directly and measurably enhanced in value as a result 
of some public improvement. In both cases the reason 
and justification for such exactions are to be found in 
the direct and measurable benefits conferred upon par- 
ticular persons. In the case of taxes, however, the cir- 
cumstances are entirely different. The actions of the 
government in protecting persons and property and in 
ministering to the general public welfare in other ways 
do not confer upon any particular citizen a distinct and 
measurable benefit. They are of the highest importance 
to all people ; but they confer a common benefit upon 
all, and it is impossible to compute the precise advan- 
tages that accrue to individual citizens. For this reason 
all persons within the jurisdiction of the government 
may be called upon to contribute to its support, and 
taxes are properly defined as compulsory contributions 
designed to meet the general public expenses. 

In former times governments were expected to depend 

upon other means of support, and to call for taxes only 

Position of in cases of special emergency. The king was 

taxes among supposed " to live of his own,'' that is, to 

public reve- ^^ 

nues. support his establishment with the revenues 

from his domains and from certain fiscal prerogatives. 
Only in case of war, or upon some other extraordinary 
occasion, was he expected to call upon his subjects for 
contributions of a part of their property. Long after 
taxation had become a usual and regular source of reve- 
nue, writers upon finance continued to speak of it as an 
extraordinary and occasional expedient. In this coun- 



PUBLIC REVENUES. 543 

try, the Assembly of Pennsylvania, as late as 1755, ad- 
vanced the following theory of taxation in that province. 
Originally the government was expected to find support 
from the proceeds of quit rents from the lands of the 
province, which belonged, of course, to the proprietors. 
Then licenses and fees were " pitched upon " for a second 
means of support. " But Governors, a Sort of Officers 
not easily satisfied with Salary, complaining that these 
were insufficient to maintain suitably the Dignity of 
their Station, occasional Presents were added from Time 
to Time ; and those at Length came to be expected as 
of Right, which, if conceded to, and established by, the 
People would have made a third Support." But in all 
countries taxation has now become the chief source of 
public revenue ; so much so, in fact, that we are inclined 
to forget or neglect the other forms of income. 

The justification for the action of government in com- 
pelling its citizens to contribute to its support is to be 

found in the necessity of maintaining: some 

The justif ica- 
agency through which collective action for Hon of 

public purposes may be secured. If the *^^^*'°* 
necessity and usefulness of having a government are ad- 
mitted, then the duty of maintaining it is established ; 
and experience has shown that taxation is an indispen- 
sable means of support. As a government may properly, 
in certain circumstances, demand the lives of its citizens, 
so also may it command their fortunes for the public ser- 
vice. But this justification of taxation can be urged only 
in behalf of taxes levied for useful and necessary objects 
of expenditure, and applied economically and honestly to 



544 PRINCIPLES OF ECONOMICS. 

such purposes. Unless these conditions are fulfilled, 
taxation becomes virtually robbery, even though prac- 
tised under the guise of law. 

§ 345. From the beginning to the end of his study of 

this subject the student is confronted by the question, 

What constitutes iustice in taxation ? A 

What consti- •' 

tutes justice in commonly accepted theory in the United 
States has been that the taxes demanded 
from each citizen should be proportioned to the benefits 
that he derives from the protection and other services 
rendered by his government. But this answer is wholly 
unsatisfactory because it is impossible to measure in any 
tangible way the benefits that any individual receives 
from most forms of governmental activity. Whenever 
such a calculation of benefits is possible, the persons who 
receive a special benefit are called upon to defray a part 
or the whole of the cost of the service rendered, as is the 
case with fees or special assessments. But taxes are 
levied for defraying general expenses, in which no meas- 
urement of particular benefits is possible. Moreover, if 
such a calculation could be made, it might be found that 
the poor, the weak, and the defenceless receive greater 
benefits than the rich and the strong derive from the 
action of the government in protecting persons and prop- 
erty ; so that this theory would necessitate such an 
apportionment of taxes as would throw the burden of 
public expenditures upon the weakest members of 
society. 

A more satisfactory theory is that each citizen should 
share in the public burdens according to his ability to 



PUBLIC REVENUES, 545 

bear them, and that faculty should be the basis for the 
apportionment of taxes. Within a family, a church, or 
a fraternal organization this principle is fol- The "faculty 
lowed ; and each person is expected to con- theory." 
tribute according to his ability whenever the attempt is 
made to apportion common burdens upon a just basis. 
But this theory gives us merely a very general principle 
whose application is somewhat difficult, for it is not easy 
to determine a perfect method of measuring each person's 
faculty, or ability. Such a measure cannot be found in 
a person's expenditures, because the possessors of large 
incomes do not consume proportionately more than peo- 
ple of moderate means. What a person consumes may 
be a measure of his necessities instead of his ability, as 
can be seen by considering the case of a man who has a 
family to support out of a moderate or small income. 
Property is often considered a fair practical criterion of 
a taxpayer's ability, and is certainly a better standard 
than expenditure can ever be. But such a measure is 
far from perfect. All property is not equally productive, 
and some of it may be unproductive or even a positive 
burden upon the owner. Besides this, many men who 
have little accumulated wealth receive wages and salaries 
from their labor or professional services, and are able to 
pay much heavier taxes than their property would in- 
dicate. Finally, revenue has been suggested as the 
proper measure of faculty. This is probably superior to 
property, but is not entirely unexceptionable, because 
revenue, like property, is not a uniform and invariable 

test. In the first place, an income derived wholly from 

36 



546 PRINCIPLES OF ECONOMICS. 

personal exertions does not indicate the same ability that 
an equal revenue derived from invested property repre- 
sents. An income of the first kind terminates when the 
ability to labor ceases, so that its recipient must save a 
part of it in order to provide for the future ; while the 
man who possesses a funded income is under no such 
necessity. In the second place, ability varies with the 
demands made upon each person's resources. Two in- 
comes may be equal, but the recipient of one may be a 
single man, while the recipient of the other may have 
an expensive family to support. Under such circum- 
stances equal incomes do not indicate equal ability. 

But even if a perfect measure of faculty is difficult of 

attainment, it is possible to secure approximate justice 

in apportioning the burden of taxation. Rev- 

The practical rr o 

measurement enue is a better measure of ability than any 
other that has been suggested, and some- 
thing may be done to correct the inequalities that may 
result from such a standard. Funded incomes may be 
taxed more heavily than those derived from personal 
exertions. This can be accomplished by imposing taxes 
upon property in addition to taxes upon incomes. Fur- 
thermore a certain minimum sum may be exempted from 
tlie operation of taxes that are levied directly upon rev- 
enue, and a rough allowance can in this way be made for 
the demands which the maintenance of a family makes 
upon the possessors of small incomes. 

§ 346. Associated with the problem of justice in tax- 
ation is the question whether the tax-rate should be 
proportional or progressive. A tax is proportional when 



PUBLIC! REVENUES. 547 

it imposes a fixed rate, say two per cent of the value 
of all objects assessed, irrespective of the total amount 
of the property or income of each tax-payer. 
Taxes are regressive when the rate in- andprogres- 

, (. , . sive taxation. 

creases as tlie amount oi property or income 
taxed decreases. Thus a fixed business license tax of 
twenty dollars upon all retail storekeepers would be 
regressive, since the rate of taxation would increase as 
the size of the business decreased. Finally, taxes are 
progressive when the rate increases as the taxable prop- 
erty or income increases. Thus a progressive income 
tax may impose a rate of one per cent upon incomes of 
11,000 or less, and may levy higher rates upon larger 
incomes. 

The injustice of a regressive tax must be evident to 
all, but there is a difference of opinion concerning the 
merits of proportional and progressive tax- conflict of 
ation. The opponents of a progressive rate op"^on. 
denounce it loudly as a measure of confiscation ; but it 
seems probable that a progressive tax, if it can be rigidly 
collected from the larger incomes, corresponds more 
nearly than a proportional tax to the demands of justice. 
This is because, as income increases, ability to bear pub- 
lic burdens probably increases at even a more rapid rate. 
A tax of two per cent may mean the sacrifice of articles 
of decency and necessity for a man who must support a 
family out of an income of $500, wliile a man who en- 
joys an income of f 10,000 will feel but slightly the pay- 
ment of a tax of the same rate. More than this, the 
possession of a large income gives a person a great 



548 PRINCIPLES OF ECONOMICS, 

advantage in the acquisition of future riches, because it 
is the first thousand dollars of a fortune that is hardest 
to acquire, since wealth begets wealth. Such considera- 
tions seem to justify a moderate increase of the rate of 
taxation as fast as the property or income increases. 
But this is true only upon the condition that the tax is 
well administered and rigidly collected. Great practical 
difficulties are encountered at precisely this point. In 
this country proportional taxes upon property or income 
are poorly enforced, and fall with undue weight upon 
persons of small or moderate means. Until we have 
administrative machinery that will enable us to reach 
large fortunes with certainty, progressive taxation would 
probably serve only to increase the inequalities that in- 
here in our existing tax systems.^ 

§ 347. Writers upon finance have commonly made 
a distinction between direct and indirect taxes. The 
Direct and in- former are said to be levied directly upon 
direct taxes, ^^iq person who has to bear the burden of 
them ; while the latter are collected in the first instance 
from people who add the amount of the tax to the prices 
of commodities, and thus shift the burden upon the 
ultimate consumers of the articles taxed. Income, poll, 
property, and inheritance taxes are called direct ; and 
customs and excise taxes are considered to be in- 
direct. In some cases this distinction is easily drawn. 
Poll or inheritance taxes are clearly borne by the very 

1 In the case of inheritance taxes it may be possible to enforce with 
reasonable certainty a progressive rate, since we have, as will be explained 
later, fairly satisfactory methods of reaching the larger estates. 



PUBLIC REVENUES, 549 

persons wlio are called upon to pay them, and most of 

our customs and excise taxes ultimately fall upon other 

people than those from whom the government collects 

them. But other cases present considerable difficulty. 

If I import goods for my own use, without resorting to 

any middleman, the customs duty will fall directly upon 

me. Again it is often difficult to determine who will 

ultimately bear the burden of such a direct tax as that 

upon property. In some cases the tax can be shifted 

from the landlord to the tenant, as will be explained in 

another place. Such facts as these seem to deprive this 

distinction between direct and indirect taxes of strict 

scientific validity. 

§ 348. If taxes are honestly and wisely expended, 

each citizen secures a large return for the sums that he 

contributes for the support of the govern- The "magic 

^^ fund" de- 

ment. But it should always be remembered lusion. 

that a tax is a deduction from the wealth of the com- 
munity and a burden upon the taxpayers. In a New 
England town-meeting the truth of this statement is 
keenly realized whenever public expenditures are author- 
ized. But when the operations of government are further 
removed from the scrutiny of the people, and revenues 
are raised by customs and excise duties which are con- 
cealed in the prices of commodities, or by corporation 
and inheritance taxes which are less felt by the mass 
of the citizens, there is danger that this fact may be 
overlooked. Some ten years ago the federal govern- 
ment annually collected surplus revenue that amounted 
to even more than one hundred million dollars, and the 



■550 PRINCIPLES OF ECONOMICS, 

evils of such a condition were not clearly recognized by 
the people. The thoughtful student hardly needs to be 
told that taxation can furnish the government with no 
" magic fund," out of which lavish expenditures can 
be made without cost to anybody. Yet it sometimes 
appears that this delusion is more commonly entertained 
than it is pleasant to believe. The only result of popu- 
lar error upon this point must be exti-avagance and cor- 
ruption in the management of public expenditures. The 
correct principle for the guidance of all governments in 
matters of taxation was finely stated in Pennsylvania's 
first constitution, which was adopted in 1776. Here 
it is declared that " the purpose for which any tax is to 
be raised ought to appear clearly to the legislature to be 
of more service to the community than the money would 
be, if not collected." 

III. Taxation in the United States. 

§ 349. Our federal government has always derived 
a very large part of its revenues from customs duties. 
Customs These are taxes imposed upon commodities 
taxes. ^i^at are imported into a country or exported 

from it. Since the Constitution of the United States 
provides that no " tax or duty shall be laid on articles 
exported from any State," the federal customs duties 
have been imposed only upon imports.^ Prior to the 

1 In official terminology our customs revenues include tonnage duties 
imposed upon shipping. These duties brought in only |844,095 in 1898, 
and will require no further discussion. But see § 41. 



TAXATION IN THE UNITED STATES. 551 

Civil War these taxes had usually furnished in times 
of peace nearly the whole of the national revenues. 
In 1860, for instance, the customs receipts amounted 
to 153,187,000, while the total revenues were only 
156,054,000. Other taxes now occupy an important 
place in our federal budget, but customs duties still 
yield about half of the ordinary receipts from taxation. 
We have- already seen that customs duties may be 
either specific or ad valorem (§ 238). The latter are 
open to the objection that they sometimes Specific and 

. ad valorem 

lead to undervaluation of imports, and facili- rates, 
tate frauds in the collection of revenues. This danger is 
a real one unless the imports are of such a character 
that the customs-house officials can readily ascertain 
their true values. Specific duties have the advantage 
of being easier to administer and more difficult to evade, 
but they too are objectionable in one important respect. 
Goods of the same general character differ widely in 
value, and a specific duty imposed upon an entire class 
of imports falls with undue weight upon the cheaper 
articles. Sometimes attempts are made to avoid such 
regressive taxation bj classifying commodities of the 
same kind according to their value, and grading the 
duties accordingly. But this classification can be only 
of a rough character, and it introduces the principle of 
ad valorem taxation. Our present tariff laws employ 
both kinds of duties, but the measure passed in 1898 
greatly increased the use of specific rates. 

If customs taxes are to yield a large revenue, the 
duties must be imposed upon articles of general con- 



552 PRINCIPLES OF ECONOMICS. 

sumption. The bulk of our customs receipts has always 
come from a few such commodities. Thus, in 1897, the 

Operation of duties on sugar, molasses, and tobacco yielded 

customs taxes. $62,300,000, or more than one third of 
the total customs revenues. With each commodity 
taxed there is a certain rate of duty that will bring in 
the largest returns to the treasury. If the demand is 
elastic, as in the case of luxuries, the rate that yields 
the largest revenue will be relatively low, because a 
higher tax diminishes the consumption more than it 
increases the receipts from the goods actually imported.^ 
Articles of common and necessary use, however, can 
usually bear higher rates. But tariffs that impose high 
duties upon* necessities are objectionable because they 
burden many industries by taxing heavily the raw 
materials used, and because they rest with unequal 
weight upon the masses of the people. A family with 
an income of $10,000 cannot consume twenty times as 
much of these commodities as twenty families with 
incomes of $500 each. Therefore a tariff constructed 
upon this principle is a form of regressive taxation. 

When the chief purpose of the tariff is to protect 
certain industries, duties are sometimes placed at such 

Protective ^ \^\^^ figure as to prove almost prohibitory. 

duties. ^\\q\\ a policy sacrifices revenue for the sake 

of protection. In this country most of our protective 
duties have not been raised sufficiently to prohibit all 

1 The student avIio has read Chapter XIII. will understand that customs 
taxes, although collected from importers, are regularly added to the 
prices of commodities and paid by consumers. For exceptions to this 
principle, see that chapter. 



TAXATION IN THE UNITED STATES. 553 

importations, but they have often served to decrease 
the receipts from certain commodities. Another effect 
of protective duties is that thej tend to take from the 
consumer more than the government receives in the 
form of a tax. The prices of the goods supplied by 
domestic producers are usually increased somewhat by 
the imposition of such duties, and the consumer must 
pay these higher prices as well as the duties collected 
at the custom-house. 

Customs revenues are often called inelastic because 
their amount cannot be readily changed to suit the 
needs of the government. A tariff can- These taxes 
not be revised every year without injury to are inelastic, 
business ; and, when the rates have once been deter- 
mined, the receipts will depend upon the volume of 
goods imported into the country. In 1893 the customs 
revenue of the United States amounted to 1203,355,000 ; 
but in the following year it fell to 1131,818,000, largely 
as a result of the prevailing industrial depression. In 
time of war these receipts are likely to decrease at the 
very time when the government is most in need of 
revenue, as we learned to our cost in 1812 and 1861. 

It will be evident that, considered by themselves, 
customs duties are open to grave objections as a sole 
source of revenue, but some of these diffi- 
culties disappear when such taxes form ^°"<^^^^^°"s- 
merely a part of a general revenue system. It is cer- 
tain that the tendency of this form of taxation is to 
throw a disproportionate burden upon those people who 
are least able to contribute to the support of the govern- 



554 PRINCIPLES OF ECONOMICS. 

ment. But this difficulty may be partly remedied by 
imposing other taxes that will oblige persons of large 
resources to pay in proportion to their means. Then 
the difficulties that arise from the inelasticity of cus- 
toms revenues may be obviated by levying other taxes 
whose yield can be easily increased whenever there is 
need of a larger income. In conclusion it may be said 
that the financial needs of all governments are so great 
that it will be impossible, for a long time to come, to 
renounce entirely the large revenues now derived from 
customs taxes. 

§ 350. Excise duties are a form of internal taxation, 
and are levied upon commodities produced within a 
country. These were first employed by the 
United States in 1791, when duties were 
imposed upon distilled spirits in order to aid the govern- 
ment in its efforts to provide for the Revolutionary debt. 
They were extremely unpopular, since there existed 
then and long afterward a widespread dislike of in- 
ternal taxation by the federal government. Accord- 
ingly, all internal taxes were repealed in 1802 ; but the 
War of- 1812 compelled Congress to levy excise duties 
on spirits and sugar. These were expressly declared 
to be " temporary war taxes " ; and they were repealed, 
with all other internal revenues, in 1817. From this 
date the government depended exclusively upon exter- 
nal taxation until the outbreak of the Civil War. Then 
it became necessary to resort to excise taxation upon 
an unprecedented scale. Congress finally levied taxes 
upon the manufacture of almost every conceivable arti- 



TAXATION IN THE UNITED STATES. 555 

cle, and the receipts from such sources rose to about 
$190,000,000 in 1866. After the war, taxation was 
reduced, and most of these excise duties were repealed. 
But the necessary expenses of the government had been 
increased so greatly that internal taxation had to be 
continued in order to provide for pensions, the public 
debt, and other expenditures resulting from the war. 
In this manner excise duties on spirits, beer, and 
tobacco became a permanent feature of our revenue 
system. The war revenue act of 1898 established a 
few new duties, such as that upon patent medicines ; 
but these emergency taxes were subsequently repealed. 
In 1905 the internal revenue receipts amounted to 
$234,095,000. 

In the collection of our excise taxes a very convenient 
and effective method is now employed.. Producers are 
required to affix stamps to all packages con- Method of 
taining the articles taxed, and this must be couection. 
done in such a way that the stamps will be broken when 
the packages are opened for consumption. Some eva- 
sion exists, especially in the case of whiskey, which can 
be distilled with simple and inexpensive appliances. In 
some large cities and in the mountainous districts of the 
South a force of revenue officers is constantly employed 
in suppressing illicit distillation. When the excise sys- 
tem was developed during the Civil War, the rates of 
duty were so high as to make the temptation to evasion 
exceedingly strong ; and it was found that " there exists 
an intimate relation between the rate of the tax and the 



556 PRINCIPLES OF ECONOMICS. 

extent of fraud and evasion." Thus in 1868 the tax on 
whiskey was $2.00 per gallon, which was more than ten 
times the original cost of production. This high rate 
of duty stimulated wholesale frauds, and the receipts 
were only $13,419,000. But then the rate was lowered 
to 10.50 per gallon, and the receipts for 1869 rose to 
more than three times the figures for the previous 
year. 

Although the excise taxes are collected from pro- 
ducers, they are, like customs duties, usually borne Vjy 
Character of Consumers, who have to pay higher prices 
these taxes, f^j, ^j-^g commodities. They resemble cus- 
toms revenues also in point of inelasticity, since they 
cannot be readily adjusted to the needs of the govern- 
ment. Thus the "hard times" prevailing in 1893 and 
1894 reduced the receipts from internal revenue from 
$161,027,000 to 1143,421,000, because the consumption 
of tobacco and liquors had fallen off. Finally, excise 
taxes resemble customs in that, in order to be produc- 
tive, they must be levied upon articles that are widely 
used. Their burden is consequently distributed un- 
equally, and they become regressive in their operation. 

It is sometimes said that both excise and customs 
duties are voluntary taxes, since citizens can avoid 
They are not *^^ necessity of paying them by refraining 
voiuntaiy. from the consumption of the articles taxed. 
This is manifestly false when necessities of life are 
selected. With articles like beer, whiskey, or tobacco, 
it may seem to be more nearly true. But if men want 
these commodities, they can avoid the tax only by giv- 



TAXATION IN THE UNITED STATES. 557 

ing up desired and customary enjoyments. This is all 
that the payment of any tax necessitates. This ques- 
tion was much discussed in this country when England 
attempted to tax the American colonies. The advo- 
cates of such taxation argued that the tax on tea was 
not imposed without the consent of the colonies, because 
it was a voluntary affair and could be avoided by any 
one who was unwilling to pay it. But the opponents 
correctly insisted that the alleged voluntary nature of 
the tea duties was wholly illusory. One writer disposed 
of the question as follows : " The same logic would* 
demonstrate that a duty on beer, candles, or soap, would 
be no tax; as we are not absolutely obliged to drink 
beer — we may drink water; we may go to bed before 
it is dark ; and we are not forced to wash our shirts." 

Excise duties have been increased by the legislation 
of the last few years, and are sure to remain an impor- 
tant source of federal revenue for a long Final consid- 
time to come. This permanence will be due erations. 
chiefly to their productiveness, to the need of such rev- 
enues, and to the comparative ease with which they are 
collected ; but they will be favored by many people who 
wish to tax liquor and tobacco heavily in order to dis-. 
courage their consumption. The revenues secured from 
excises are superior to those collected in the form of 
customs duties in the point of reliability in time of such 
a national emergency as a war with a powerful foreign 
nation. Finally, whatever injustice may result from the 
inequality of our excise duties may be partially cor- 
rected by developing other sources of revenue that shall 



558 PRINCIPLES OF ECONOMICS. 

be drawn from those classes who pay less than their 
just share of the taxes levied upon consumption, 

§ 351. Many kinds of transactions have been taxed 
by governments, but revenues derived from such sources 
Taxes on have usually been of secondary importance, 
transactions, rpj^^ famous Stamp Act of 1765 was an at- 
tempt to tax transfers of real estate, suits at law, inheri- 
tances, various commercial transactions, and marriage 
licenses, by requiring that stamps or stamped paper 
should be used for all such purposes. In 1794 the 
United States levied taxes upon sales at auction, and 
three years later stamp duties were imposed upon many 
kinds of legal and commercial instruments. These 
taxes, as well as the other parts of the internal revenue 
system, were repealed in 1802 ; but similar ones were 
reintroduced in 1813, only to be abolished again in 
1817. During the Civil War a most extensive system 
of stamp duties was imposed upon almost all kinds of 
business and legal transactions where legal instruments 
were used, and sales at auction were again taxed. No 
inconsiderable revenue was secured from this source, 
but the taxes were repealed at the close of the war 
period. Finally the war revenue act of 1898 tempora- 
rily imposed stamp taxes on bills of exchange, trans- 
fers of stocks and bonds, bills of lading, bank checks, 
telegraph messages, and some other transactions. 

These taxes may be a convenient and legitimate 
source of revenue if the rates are moderate, and do not 
obstruct business or legal transactions. This last- 
mentioned danger is a real one. Taxes on receipts, 



TAXATION IN THE UNITED STATES. 559 

for instance, lead to the neglect of a necessary business 
form where only small amounts are concerned. The 
stamp tax imposed on bank checks in 1898 operation of 
was objectionable because it tended to dis- these taxes, 
courage the use of checks in small, every-day transac- 
tions, and retarded the dev^elopment of deposit banking 
in country districts where it was especially desirable. In 
a majority of cases transaction taxes are borne by the 
consumer or purchaser, since they increase the expense 
of supplying him with the commodity or service ren- 
dered. This was the case, for instance, with the tax of 
one cent on express receipts and telegraph messages, im- 
posed by the law of 1898. But the result is sometimes 
different, The tax of one cent on parlor-car tickets was 
actually borne by the transportation companies, perhaps 
because it formed but a very small percentage of the 
prices charged to patrons, and the companies could 
afford to neglect it. 

§ 352. Many of our American commonwealths levy 
poll or capitation taxes. These are imposed at a uni- 
form rate, as two dollars per poll, upon all pon^axes. 
males between the ages of 20 or 21 and 
45 or 60. They are poorly collected, and are usually 
evaded by all persons who do not have to pay taxes upon 
property. The total receipts, therefore, are small. In 
a few states payment of a poll tax is made a condition 
precedent to voting, with the result that each political 
party pays the taxes of many of its voters. Corruption 
necessarily follows from such conditions. The poll tax 
has been abandoned in most civilized countries, and 



560 PRINCIPLES OF ECONOMICS, 

must be viewed as an antiquated financial expedient. 
It is, moreover, unjust in its operation, since it exacts 
equal contributions from all, regardless of the different 
abilities of taxpayers. 

§ 353. American states, counties, and towns have 
long derived most of their revenue from the general 
The general property tax, which is supposed to be levied 
property tax. upon all the property, both real and per- 
sonal, in the possession of taxpayers. In the census 
year 1890, the total amount of our state and local 
revenues was placed at 1584,835,000 ; and of this sum, 
taxes on property yielded $443,096,000, or about seventy- 
five per cent. It appeared, furthermore, that all the 
taxes other than that on property which were raised in 
this country, by federal or local authorities, brought in 
about 1453,000,000 ; so that the property tax was nearly 
as important as all other forms of taxation combined. 

While there are some differences in the methods 

pursued, the lavvs of the various states provide that 

, assessors shall be empowered to make an 

Its assessment ^ ^ 

and apportion- exhaustive enumeration of all kinds of tax- 
able property. In this work of assessment, 
taxpayers are often called upon to make detailed state- 
ments of their possessions, and this usually must be 
done under oath ; but the assessors have the power to 
correct these declarations, whenever there is reason to 
suspect that a full disclosure has not been made. 
Finally, taxpayers may appeal to higher officials or to 
the courts for rectification of erroneous assessments. 
The property is supposed to be rated at its true value. 



TAXATION IN TEE UNITED STATES. 561 

and the tax rate is a certain per cent of the assessed 
valuation. Local taxes are levied upon the assessment 
rolls of each town or county ; but the tax for state pur- 
poses, after the amount to be raised has been deter- 
mined, is apportioned among the various local units 
upon the basis of the respective valuations of their 
taxable property. In this way the amount finally col- 
lected from each taxpayer is the sum of the rates levied 
for state purposes and for local. 

In its actual operation the general property tax causes 
great inequality in the distribution of the tax levied 
for state purposes. Each board of local unjust appor- 

assessors has a strong; inducement to under- ^o^™®"* ^ 
'^ tne property 

value the taxable property found in its own tax. 
district, because, by such a course, the amount of the 
state tax apportioned to the locality will be reduced. 
The result is that property is almost never rated at its 
full value ; while the assessed valuation may be only ten 
or twenty per cent of the true valuation in some sections, 
and as high as eighty or ninety per cent in others. In 
one state the valuations of real estate in different coun- 
ties have ranged from five to one hundred per cent of 
the actual selling price of the property. It follows neces- 
sarily that the burden of state taxation is distributed 
most unjustly among the various local units. To remedy 
this difficulty state boards of equalization have been 
formed, and authorized to correct these inequalities of 
apportionment. But this could be done only by an 
actual revaluation of all the property of the state; and 

the boards of equalization, at the best, can merely pro- 

36 



562 PRINCIPLES OF ECONOMICS 

ceed by rough guesswork. In many cases unseemly 

contests ensue between city and country interests, each 

seeking to control the boards and to increase the other's 

share of state burdens. 

A second cause of the grossest injustice is the failure 

of this tax to reach personal property, A large part 

,. . ., . of the wealth of a modern community con- 
its failure to ^ "^ 

reacii personal sists of corporation stocks and bonds, mort- 
^^^^ ' gages, notes, book accounts, and other forms 
of intangible personalty that easily escape the sharpest 
investigation of the assessors. Moreover, these officials 
are usually elected by the votes of the men whom they 
have to assess, and they are not inclined to adopt very 
vigorous means of discovering the less tangible property 
of the voters. Most of the personal property that is 
actually reached consists of stock in trade, machinery, 
and live stock or other farm capital. In 1896 nearly 
two-thirds of the personalty taxed in Massachusetts 
consisted of tangible goods of this character. In 1850 
the total assessed valuation of personal property in all 
the states was $2,125,000,000, while real estate was 
valued ^t $3,899,000,000. In 18^0 the personalty was 
assessed at only 16,516,000,000 while realty was assessed 
at $18,956,000,000. it will be noticed that in forty 
years the assessed valuation of personal property had 
increased by only $4,391,000,000; while that of real 
property increased by $15,057,000,000. Now it is a well 
known fact that during this period there has been a very 
great increase of personal property, especially in its less 
tangible forms. Yet its assessed valuation now forms a 



TAXATION IN THE UNITED STATES. 563 

smaller proportion of the total property taxed than was 
the case in 1850. In the State of New York the propor- 
tion of personal property has constantly decreased, until 
nine-tenths of the burden of taxation falls upon real 
estate. In the City of Brooklyn, in 1895, personal 
property bore less than two per cent of the total tax. In 
New York the richest men in the country are assessed 
for only a few hundred thousand dollars of personal 
property, when their known investments in corporate 
securities yield annual incomes that amount to millions. 
It may be stated as a general principle, therefore, that 
the taxation of personal property " is in inverse ratio to 
its quantity " ; and that " the more it increases, the less 
it pays." An inevitable result of this is that state taxa- 
tion falls with undue weight upon the country districts, 
where there is little intangible wealth, and personal 
property exists in the form of household goods, live 
stock, and farm implements, all of which cannot hope 
to escape the assessor. 

One other kind of abuses arising from the present 
property taxes must not be overlooked. While all 
real estate can easily be found by the asses- 

•^ '' Unjust valua- 

sor, the valuations of different properties tionsofreai 
are often most unequal. As has been seen, 
undervaluation is the general rule ; and it is probable 
that, throughout the country, the assessment of real 
property does not exceed one-half of its actual value. 
The systematic undervaluations that prevail open the 
door to gross abuses in some of our large cities, where 
the most valuable lots and buildings are sometimes 



564 PRINCIPLES OF ECONOMICS. 

assessed much more lightly than smaller properties. 
Thus in Chicago, a few years ago, it was found that 
seventy of the choicest pieces of real estate were assessed 
at less than nine per cent of their true value ; while eighty 
small estates, worth $4,000 and less, were assessed at 
almost sixteen per cent of the actual selling price. 

But we cannot stop even here in our statement of the 
evils that attend the present administration of the prop- 
erty tax. Existing laws offer to taxpayers 

Demoralization . . „ , 

caused by the terrible inducements to commit frauds. 

*^' When each citizen is compelled to declare 

under oath the full value of his property, perjury is the 
usual result. An honest man, who desires to pay all 
that is justly due from him, knows that, if he tells the 
whole truth, he will have to bear two or three times his 
fair burden. Thus our present laws punish honesty 
with a double load of taxes, and allow the dishonest and 
unscrupulous tax-dodger to escape. 

It is extremely difficult to present in a few paragraphs 
an adequate discussion of the incidence of the general 

Incidence of property tax. We must realize at the outset 

the property ^-^sit we are not dealing with one tax, but 

tax: I. On *=' ' ^ 

land. rather with a group of diverse taxes, which 

may be classified as follows : (1) a tax on land ; (2) a 
tax on consumable goods in the hands of their owners ; 
and (3) taxes on investments of private capital.^ The 
incidence of the tax on land will be first considered. 
This tax is levied in this country upon the selling price 
of the land, and it is virtually graded according to the 

1 It Private capital" is used strictly in the sense explained in § 260. 



TAXATION IN THE UNITED STATES. 565 

amount of rent that each tract yields, since the selling 
price is the annual rental capitalized at the current rates 
of interest. Now a tax levied upon economic rent must 
be borne by the landowner, and cannot be shifted. The 
rent of land is determined by the superior advantages 
that one tract furnishes for the investment of capital 
over the opportunities offered by the poorest tracts util- 
ized. The landlord will, if competition is active, exact 
from the tenant all that the superior situation or quality 
of his land enables him to demand. The imposition of 
the tax will not alter the situation so as to change the 
economic rent and enable the landlord to shift the bur- 
den onto the tenant by charging a higher rental. But 
It is important to notice that the land tax in this country 
is a burden mainly upon the original owner of the prop- 
erty at the time that a new tax is first laid, or an old 
one increased. This is because a prospective purchaser 
will make allowance for the tax when he determines 
how much he can afford to pay for the land. Invest- 
ments in corporation securities and many other things 
largely escape taxation under our present methods. A 
man will not purchase land unless he can obtain from it 
the same return that can be secured from these untaxed 
investments ; and he will, accordingly, offer a smaller 
price than he would be willing to pay if the land 
were untaxed.^ Thus, if a tract of land yielded an 
annual rent of $5,000, and the rate of interest on equally 
secure investments was five per cent, its selling price 

1 If all forms of investment were taxed with the same certainty as 
land, the case would be otherwise. 



566 PRINCIPLES OF ECONOMICS, 

would be $100,000. Now if a tax of $500 should be im- 
posed, prospective purchasers would deduct 110,000, the 
capitalized value of the tax, from the price that they 
would be willing to pay ; and the burden would fall en- 
tirely upon the original owner. 

The property tax, in the second case, reaches many 
kinds of consumers' goods in the hands of their owners, 

2. On consum- such as dwelling-houses inhabited by own- 
ers' goods. Q^.g^ household furniture, and the like. All 

these goods are not kept for sale or for hire, but solely 
for the* owners' use. Consequently the tax cannot be 
shifted onto tenants or purchasers, and must be borne 
by the owners of the property. 

In the third case, the general property tax is sup- 
posed to fall upon all kinds of private capital invested 
for the sake of income. If the purpose of 

3. On invest- 
ments of the laws were actually accomplished, so 

capital. ^j^^^ ^Y possible fields of investment were 

taxed equally, the tax could not be shifted, and would 
be borne by the owners of capital. This is for the 
reason that shifting can take place only when capital 
can be withdrawn from an industry that is taxed, and 
invested in others that are free from taxation. When 
this can be done, the taxation of capital invested in a 
few industries results in a readjustment of prices, 
which will finally enable the taxed investments to yield 
the same return as those which are untaxed. Now 
the wholesale evasion of our property tax leaves a large 
part of the field for investments virtually untaxed, so 
that it is frequently possible tor shifting to take place. 



TAXATION IN THE UNITED STATES. 56 T 

Some of the more important kinds of investments need 
to be examined separately. (A) Taxes upon dwelling- 
houses that are built for hire are in large measure 
shifted onto the occupier, since capitalists will not 
make such investments unless the same rate of return 
can be obtained as can be secured in untaxed enter- 
prises. In case, however, a lessened demand for lodg- 
ings makes the supply of houses greater than the 
number actually required, then rentals will have to be 
lowered and the tax will fall upon the owners. This 
is because the capital invested in the form of houses 
cannot be withdrawn and applied elsewhere in new 
enterprises. {B) Taxes upon buildings, machinery, and 
stocks of goods used in commerce or manufactures 
would also be shifted if competition were perfect. But 
these investments, when once made, are highly special- 
ized, and trade conditions often make it difficult to 
shift such taxes upon consumers. Thus, for instance, 
competition by foreign producers, or by producers more 
advantageously situated in some other part of the 
country, may render it impossible for merchants or 
manufacturers to raise prices and shift the tax. ((7) 
The same considerations apply to taxes on buildings, 
live stock, and implements used in agriculture, and 
with added force. American farmers sell a large part 
of their products in foreign markets where prices are 
determined by international competition. Moreover, 
they are slow to adjust themselves to new conditions, 
so that competition acts very imperfectly upon agri- 
cultural industry. It seems reasonably certain that 



568 PRINCIPLES OF ECONOMICS. 

taxes upon farming capital are borne by the farmers 
themselves. (B) Taxes upon mortgages operate very 
differently. The capital invested in this manner is 
more free to seek the most profitable fields of invest- 
ment. It can in a few years leave any state or com- 
munity where unusual burdens are placed upon it, and 
has repeatedly done so. The result is that, where our 
tax laws actually reach mortgage investments, the tax 
is surely shifted upon the borrower, in the form of a 
higher rate of interest. In many states mortgages 
practically evade all taxation ; but when they are 
reached, as in California, the rate of interest is higher 
than that asked for other equally safe investments, and 
higher by something more than the amount of the tax. 
(JE) Finally, we may mention taxes upon corporation 
stocks and bonds. For the most part these escape 
taxation, but, when they are reached, the probability 
is that shifting often takes place. (-F) The results 
of the foregoing discussion need to be qualified in the 
case of taxes that reach enterprises of a monopolistic 
character. These cannot be shifted if they are fixed 
in amount, or if they are proportioned to monopoly 
profits. This has been explained in a previous chapter 
(§ 201). 

Our general property tax has been shown to be 
largely a tax upon real estate, since most personal 
property, except that of a tangible form, 
concerning the escapes the asscssors. In its apportion- 
ment there are the grossest inequalities 
between different towns and counties, while between 



TAXATION IN THE UNITED STATES. 569 

individual citizens its burdens are often distributed 
without the remotest approach to justice. More than 
this, it has become a fruitful source of demoralization, 
and is systematically educating our people in habits 
of fraud and perjury. In theory the tax is unjust as 
a main source of public revenue, since property is not 
the best measare of ability ; and in practice " the gen- 
eral property tax as actually administered is beyond 
all doubt one of the worst taxes known in the civilized 
world." ^ It has been abandoned in most other coun- 
tries as a principal form of taxation, and is condemned 
by practically all students of finance. 

§ 354. The stocks and bonds of business corpora- 
tions have been taxable under the theory of the gen- 
eral property tax, and our states have corporation 
undertaken to find and assess corporate *^®^* 
securities in the possession of their citizens. But 
these efforts have met with little success, and the 
general property tax has utterly failed to reach such 
intangible forms of personal property. Accordingly, 
various states have adopted a more successful expedi- 
ent, — the taxation of the corporations themselves ; 
and these special taxes upon corporations have assumed 
increasing importance as the number of corporate 
enterprises has increased. It is almost needless to 
add that the states have found it much easier to deal 
directly with a corporation than to discover and assess 
its stocks and bonds in the hands of individual holders. 

1 Seligman, Essays in Taxation, 61. All students of the subject have 
failed to find words strong enough to do justice to the iniquities of the 
tax. 



570 PRINCIPLES OF ECONOMICS, 

The development of special corporation taxes in 

many states has taken the form of the taxation of banks, 

insurance companies, railroads, teleo-raph 

Taxes on spe- . => f' 

ciai corpora- and express companies, and some other cor- 
porate enterprises. Banks are commonly 
taxed upon their capital stock, the corporation usually 
being required to pay the tax and to withhold the 
amounts from the dividends received by the share- 
holders. This method of collection is called " stoppage 
at the source ; " and by means of it private incomes 
may be found and taxed with entire certainty at the 
source whence they arise. In addition, banks pay the 
regular property tax on their real estate. Insurance 
companies are usually taxed upon their premiums, or 
gross receipts, but sometimes net receipts are made 
the basis of assessment. Railroads are taxed in a 
great variety of ways. In many states the gross earn- 
ings are taxed; in others the tax is levied upon the 
value of the outstanding stocks and bonds. When a 
railroad operates in different states, the tax in any 
single state is usually levied upon an amount of gross 
earnings or outstanding securities that corresponds to 
the proportion which the mileage of the railroad in 
that state bears to the total mileage of the system. 
Sometimes this special tax takes the place of all other 
forms of taxation ; in other cases, the roads are sub- 
ject to local taxation of their real estate. Telegraph 
companies, finally, are taxed upon their gross receipts 
or their mileage. 

In some states a general corporation tax has been 



TAXATION IN THE UNITED STATES, 571 

established, and made applicable to all corporations 
except those otherwise provided for. Thus Pennsyl- 
vania imposes a tax of live mills on each 

^ The general 

dollar of actual value of the capital stock corporation 
of all corporations doing business within its 
boundaries, besides a tax of four mills on each dollar 
of interest paid on corporation bonds or certificates 
of indebtedness. This takes the place of all state 
taxation. While New York is the only state that has 
gone as far as Pennsylvania in developing a general 
corporation tax, a number of others have taxes that 
apply to domestic corporations. 

The diversity of practice in different states makes it 
difficult to describe corporation taxes in a few para- 
graphs, and the student should supplement The future of 
this statement by a careful study of the sys- these taxes, 
tem employed in his own locality. It seems certain that 
the constant increase in the number and importance of 
corporate undertakings will result in a corresponding 
development of this form of taxation. In some cases 
more revenue is now collected for state purposes by 
means of corporation taxes than by the general property 
tax.^ It is to be hoped that the old and futile attempts 
to make the tax on property reach corporate securities 

1 In 1904 Massachusetts collected for state purposes $4,114,000 by cor- 
poration taxes, and $2,500,000 by the tax on property. In the year 1902 
Pennsylvania collected $10,364,000 from corporations, and $3,530,000 
from a tax on personal property, real estate not being taxed for state 
purposes. In 1904 New Jersey raised $3,225,000 from taxes on corpora- 
tions, and levied no tax on property for state purposes. In 1890 the 
census showed that all the States received $21,837,866 from taxes upon 
corporations. This amount is much larger to-day. 



572 PRINCIPLES OF ECONOMICS. 

in the hands of the holders will be entirely superseded 
by taxes assessed directly upon the corporations. This 
will make it possible to collect taxes from the companies 
themselves, and will make evasion difficult. 

In the taxation of corporations the chief difficulties 
encountered are of a legal character. Citizens of one 
other consid- State may charter a company in another 
erations. g^^te for the purpose of carrying on busi- 
ness in a dozen others. Under such conditions, the 
work of framing a state corporation tax is very difficult. 
A tax upon the gross receipts of a corporation chartered 
in another state is invalid if that corporation derives 
its income, even in part, from interstate business, be- 
cause it is held to be a restraint upon interstate com- 
merce, which is beyond state control. Again, a state 
in which a company is chartered cannot tax corporate 
bonds owned by non-residents, because such a tax would 
extend to property and interests beyond its jurisdiction. 
If the federal government possessed constitutional au- 
thority to tax corporations and distribute the proceeds 
equitably among the states, all these troubles could be 
easily removed. As it is, the situation is a difficult one ; 
yet much has already been accomplished. Recent au- 
thorities favor a tax upon that part of the net receipts 
of corporations which is derived from business transacted 
within the state levying the assessment, provided that 
the traffic is of such a character that this proportion can 
be ascertained, and provided further that the courts 
will uphold such a system. If, however, the courts 
should decide otherwise, it would be best to levy the 



TAXATION IN THE UNITED STATES. 573 

tax upon that part of the market value of the capital 
stock plus the bonded debt which is employed within 
the state. 

§ 355. License taxes upon various business and pro- 
fessional pursuits have often been employed in the United 

States. In 1794 and 1813 the federal gov- 

License taxes. 
ernment imposed such taxes on some classes 

of liquor dealers, but these imposts were not permanent. 
During the Civil War a most extensive system of license 
taxes was imposed on merchants, bankers, brokers, and 
professional men. In some cases these were fixed sums, 
in others they were roughly graduated according to the 
amount of business transacted. In general they were 
regressive in their operation, and bore heavily upon the 
smaller dealers. After the war we retained only the 
federal license taxes upon dealers in tobacco and liquors, 
but the war revenue act of 1898 imposed taxes on bank- 
ers, brokers, proprietors of places of public amusement, 
and pawnbrokers. 

Practically all of our cities and many of the states 
make use of license taxes upon certain occupations. 

These are usually fixed sums, but are some- „^ ^ ^ , , 
•^ ' state and local 

times graduated in a manner that roughly Ucensetax- 
corresponds to the abilities of the taxpayers. 
In the cities of the South a very extensive system of 
taxes on business and professional pursuits is often em- 
ployed. In one city licenses were required a few years 
ago for fifty-six classes of occupations. Such taxes tend 
to restrict competition from new enterprises, and they 
bear with very unequal weight vpon the smaller estab* 



574 PRINCIPLE'S OF L'COJyOMIU;:^. 

lishments. In other parts of the country license charges 
are imposed only upon a few occupations, such as the 
business of liquor dealers, peddlers, pawnbrokers, and 
the like. Taxes upon the sale of liquors usually yield 
far more revenue than all the rest of these license taxes. 
But Pennsylvania has a system of mercantile licenses 
on peddlers, merchants, stockbrokers, theatres, etc., 
from which the state government derived a revenue of 
12,646,000 in the year 1902. In some states receipts 
from liquor licenses are divided between the state and 
local governments. Thus Massachusetts, in 1904, re- 
ceived 1802,000 from this source; and turned over to 
the towns and cities the remaining three fourths of the 
tax. New York now derives from taxes upon the sale 
of liquors a very large revenue, which amounted to 
19,163,000 during the year 1905. These hcense taxes 
are employed partly for the purpose of regulating and 
restricting the traffic, especially in the case of the tax 
upon the sale of intoxicating liquors. But the liquor 
tax is an important source of revenue to most cities and 
to some of the states. 

§ 356. The inheritance tax, as it is popularly called, 
is imposed " on the devolution of property, whether real 
Theinheri- ^^ personal, whether by will or by intes- 
tancetax. tacy." It is extensively employed to-day 
in Great Britain, Switzerland, and Australia; and has 
been introduced, in some form, in thirty-six of our 
states. In some of these commonwealths only collat- 
eral inheritances are taxed, but in many cases direct 
inheritances are also included. The tax has met with 



TAXATION IN THE UNITED STATES, 575 

such general favor that its adoption in other states seems 
merely a question of time. 

In levying the inheritance tax a certain minimum 
amount of property is exempted from its operation. 
Thus in Massachusetts no estate is taxed Methods of 
unless its value, after all debts are paid, assessment, 
exceeds f 10,000. In that state, also, bequests for edu- 
cational, charitable, or religious purposes are exempted. 
In Illinois, Wisconsin, and some other states the rate of 
this tax has been made progressive. When this is done, 
the rate should not only be higher on large estates than 
upon small, but also higher for collateral inheritances 
than for those in the direct line. 

In theory inheritance taxes are just, since the receipt 

of an inheritance of $10,000 or more is certainly a good 

indication of ability to bear public burdens. 

*' ^ *■ Operatioiiof 

In practice the taxes imposed by our States iniieritaiice 
have worked well, since they are easily col- 
lected and are subject to much less evasion than many 
other forms of taxation. Most estates have to pass 
through the probate courts because it is difficult other- 
wise to determine the assets, settle the debts, and effect 
a just distribution among the heirs. Thus publicity is 
ensured, and the collection of the tax is fairly certain 
and very inexpensive. While it might be possible to 
increase the rates of inheritance taxes sufficiently to 
check the growth and transmission of large fortunes, no 
such consideration is involved in the imposition of a 
moderate tax, which can be easily defended as a most 
just method of raising public revenue. Even a moder- 



676 PRINCIPLES OF ECONOMICS. - 

ately progressive rate can be justified, since it cor- 
responds better to the abilities of the taxpayers and can 
be collected with certainty (§ 346). Of course, this tax 
falls wholly upon the recipient of the inheritance, who 
has no way in which he may shift the burden. Some 
states already find the tax on inheritances an impor- 
tant branch of revenue. In 1905 New York received 
14,627,000 from this source; while Pennsylvania, in 
1902, received 11,231,705., The extension of the tax to 
all inheritances in excess of 110,000, whether direct or 
collateral, and the imposition of a reasonably high rate j 
would enable most of the states to collect a large rev- 1 
enue with little expense. 

The war revenue act of 1898 established a federal tax 

upon inheritances of personal property whenever the 

^ ^ _ estate exceeded $10,000. The law followed 

Federal tax- ' 

ationofin- correct principles in making the rate lighter 

beiitances. 

upon property passmg to direct relatives 

than upon that passing to distant heirs, and in gradu- 
ating the tax according to the size of the estate. Tlie 
highest rate imposed equaled fifteen per cent upon es- 
tates exceeding 11,000,000 passing to the most distant 
collateral relatives or to "strangers in blood." Con- 
gress very wisely repealed this tax after the war, so 
that it is no longer levied by the national government. 
Many states are already taxing inheritances with the i 
best of results, and others are sure to adopt this form of 
taxation in the absence of the complications that would 
arise from a similar federal tax. All the revenue that 
can be properly derived from this source is needed by 



TAXATION IN THE UNITED STATES. 577 

the states in order to enable them to effect the most 
necessary reforms in their tax systems. The needs of 
the federal government can be met by other means, and 
a federal inheritance tax would probably tend to check 
this desirable movement toward the general adoption of 
this form of taxation by the states. 

§ 357. Income taxes are levied in proportion to the 
income of the taxpayer. Great Britain has employed 
a tax of this character continuously since ^he income 
1842, and now derives about 1150,000,000 tax. 
from this source. Italy, Prussia, Saxony, and other Ger- 
man states also tax incomes ; and within recent years 
similar taxes have been established in Holland and New 
Zealand. In this country the taxation of incomes was 
formerly practised by some of the states ; but the tax 
was poorly administered, and has been abandoned in 
most cases. Only Virginia retains a general income 
tax, but a few other states have taxes on certain kinds 
of incomes. The revenues secured in this manner, how- 
ever, are unimportant. 

During the Civil War our government levied a gen- 
eral income tax, which yielded 172,982,000 in 1866. 

After that time, however, the law was modi- 

. Federal taxa- 

ned by reducmg the rate and exemptmg tionofin- 

incomes of less than |2000, so that the re- ^^^^^' 
ceipts declined until the tax was abandoned after 1872. 
In 1894, in order to provide needed revenue, another 
income tax was established ; but this was declared un- 
constitutional before it had gone into operation. The 
Constitution requires that representatives .and direct 

37 



578 PRINCIPLES OF ECONOMICS. 

taxes shall be apportioned among the several states 
" according to their respective numbers." Congress 
has attempted to levy such an apportioned tax only 
three times, and the results have been very unsatis- 
factory. At the present day the various sections of the 
country differ so widely in point of wealth that any tax 
levied according to numbers would be absolutely repug- 
nant to all ideas of justice; and the experiment will 
probably never be tried again. The income tax of 1862 
was not apportioned among the states, but was levied as 
an indirect tax upon incomes wherever they might be 
found. 

The law of 1894 followed the same method ; but 
the Supreme Court decided that the tax was a direct 
tax within the meaning of the Constitution and could 
be levied only by the rule of apportionment. This 
decision was reached by a divided bench, and reversed 
all precedents ; for it had been held previously that 
poll and land taxes were the only direct taxes contem- 
plated by the Constitution. Its effect is to make federal 
taxation of incomes practically impossible, since an 
apportioned income tax would be a shameful mockery 
of all justice. Although this decision has been ac- 
cepted as final by the tax-dodgers who attacked the law 
of 1894, it is not certain that it commended itself to 
the best thought of the country. Lowell's words, 
written concerning the Dred Scott decision, are de- 
cidedly pertinent here: "With history before us, it is 
no treason to question the infallibility of a court; for 
courts are never wiser or more venerable than the men 



TAXATION IN THE UNITED STATES. 579 

composing them, and a decision that reverses precedent 
cannot arrogate to itself any immunity from reversal." 

An income tax, if it can be well enforced, is one of 
the most just forms of taxation, since income is a better 
test of faculty than any other single crite- The theory of 
rion. If it is a general tax upon all forms the income 
of income, it cannot be easily shifted, as has 
been explained in a previous paragraph. If some forms 
of income are exempt, or if the tax is partially evaded, 
it then operates like a tax upon special forms of invest- 
ment, and is likely to be shifted. But in any case, 
wherever it reaches the rent from land or the income 
from monopoly privileges, it probably rests upon the 
persons upon whom it is assessed. In framing income 
taxes it is usual to exempt small incomes, of less than 
$500, for instance. This can be justified upon two 
grounds. The recipients of such incomes, in the first 
place, are certain to bear a disproportionate share of 
the taxes levied upon consumption ; and the exemption 
of this minimum amount serves to equalize the whole 
burden of taxation. In the second place, a tax upon 
such small incomes costs as much to collect as it 
brings into the public treasury; and is, therefore, not 
an economical measure. 

Unless the best methods are employed, the income 

tax is difficult to collect. The tax levied during the 

Civil War was not framed as wisely as it ^^ , , . 

'' The adminis- 

might have been, and was subject to a great tration of in- 
deal of evasion, especially after the war had 
come to an end. It encountered bitter hostility in 



580 PRINCIPLES OF ECONOMICS. 

some quarters, as did the tax established in 1894 ; but 
this opposition was largely confined to a single locality, 
where the richest men of the country are gathered in 
large numbers. In England and other countries income 
taxes have been constantly improved, and operate more 
satisfactorily the longer they remain in force. The 
English laws divide incomes into five classes, and at- 
tempt to reach revenue at its sources, whenever that 
can be done. This method is capable of extensive 
application. Taxes on incomes derived from corpora- 
tion securities can be collected from the corporations, 
and the same thing can be done with the salaries of the 
employees of such companies. The rent of real estate 
can be easily ascertained, and can be collected from the 
occupier, who can deduct it from his rent, if he be a 
tenant. If the land is mortgaged, a proportional amount 
can be deducted from the interest payments. Salaries 
of public officials can, of course, be taxed readily at the 
source. This leaves only three kinds of incomes un- 
provided for, viz.^ profits from the cultivation of land, 
the profits of unincorporated manufacturing or mercan- 
tile enterprises, and the earnings of professional men. 
In these cases it may be necessary to employ personal 
declarations of the taxpayers ; ^ but the tax officials can 
secure various external criteria by which to test the 
accuracy of the statements returned, so that gross 

1 In England the tax on agricultural profits is fixed at a certain per 
cent of the annual value of the property, and declarations of the taxpayers 
are not required. Professor H. C. Adams has recently suggested a plan 
for taxing professional incomes without resorting to declarations. See 
Science of Finance, 505. 



. TAXATION IN THE UNITED STATES. 581 

evasions can be prevented. One final matter should be 
noted. The methods of assessment just outlined, which 
are the best yet developed, presuppose that the rate 
of the income tax will be proportional. With these 
methods the whole amount of a person's income is not 
determined, and the government must content itself 
with merely ascertaining the particular sources of rev- 
enue. It is manifestly impossible to impose a progres- 
sive rate under these conditions. The ascertainment 
of each taxpayer's entire income and the imposition of 
a progressive rate would be more just, if such a thing 
were practicable. But a proportional tax strictly en- 
forced and collected is preferable in all respects to a 
graduated tax that is subject to wholesale evasion. 

The experience of many countries shows that the 
taxation of income finds increasing favor as a just and 
lucrative source of public revenue. It seems conclusions 
probable that public opinion in the United ^cm^tSa- 
States will show a similar tendency, so that tcon. 
income taxation may become a live issue in the near 
future. Some writers favor the imposition of income 
taxes by the states, especially since the recent decision 
of the Supreme Court makes a federal tax impossible 
for the present. But it would probably be impossible 
for the states to operate successfully a system of income 
taxation. The principal reason for this belief is that 
wealthy persons can so easily move out of a state that 
taxes incomes into another that imposes no such burdens. 
New Jersey, Delaware, and other states would certainly 
hold out inducements for people who wished to avoid 



582 PRINCIPLES OF ECONOMICS. 

their just public obligations ; so that New York and 
Pennsylvania, for instance, could not establish satisfac- 
tory income taxes. A second reason is found in the 
legal difficulties that would attend such taxation if con- 
ducted by the states. These are of the same nature as 
those which attend our state corporation taxes. A final 
reason is that a state could not apply the best methods 
of collection in many cases, because the stoppage of 
incomes at the source could not be applied to corpora- 
tions chartered in other states. Federal taxation of 
incomes would be the only satisfactory plan, and it is 
sincerely to be hoped that the constitutional difficulties 
that now prevent such action may be ultimately re- 
moved. The federal government would be free from 
the legal difficulties that would beset the states in a 
similar effort, and citizens would not leave the country 
in order to avoid their obligations. Finally, the federal 
officials would administer the tax far more strictly than 
the local assessors could possibly do under the pressure 
that would be brought to bear upon them. 

§ 358. In concluding tliis subject it will be desirable 

to present a brief survey of the entire field of American 

Summary taxation, and to show in what directions im- 

ationiJSr pi'ovement is desirable and possible.^ In 

United states, order to gain a rational view of this subject 

it is necessary for the student to treat all state, local, 

or federal revenues as parts of one system, and to con- 

1 The only comprehensive treatment of this entire subject is to be 
found in Adams, The Science of Finance, 490-516. With respect to the 
income tax the author's views are not in accord with those of Professor 
A.dams. 



TAXATION IN THE UNITED STATES. 583 

sider each tax in its relations to this general system of 
finance. Any other method of procedure results only 
in confusion. 

Customs taxes are practically reserved for the use 
of the federal government by the Constitution, which 
forbids any state to '' lay any imposts or Federal Tax- 
duties on imports or exports." Excise tax- ^^^^' 
ation also can be practised only by the federal author- 
ities, since no state could undertake to tax the production 
of commodities without driving manufacturing industries 
into other states. Thus two great branches of revenue 
are already marked out for the exclusive use of the 
national government. Federal taxes on transactions, 
such as were used during the Civil and the Spanish wars, 
should be employed with great moderation, since they 
are likely to obstruct commercial or legal proceedings. 
It would probably be wise to resort to this form of taxa- 
tion only as an emergency measure. Two other branches 
of revenue would complete a satisfactory scheme of 
federal finance. One of these is the taxation of inter- 
state commerce, which could be made very productive. 
This is advocated strongly by Professor Adams.^ The 
other is the taxation of incomes, whenever the present 
constitutional difficulties may be removed either by 
constitutional amendment or by another change in the 
attitude of the Supremi; Court. In times of great emer- 
gency both of these taxes might be needed : but, under 
ordinary circumstances, either one would suffice. If a 
choice is to be made between the two forms of revenue, 

i The Science of Einaace, 494-496. 



584 PRINCIPLES OF ECONOMICS. 

a federal income tax would, in the judgment of the 
author, be decidedly preferable. The bulk of our 
national income will be derived, for a long time to 
come, from excise and customs taxes, which cannot be 
made to operate justly, since expenditure is one of the 
worst possible tests of a taxpayer's faculty. An income 
tax that should exempt all incomes of less than $600 
would be the best available means of correcting the 
inequalities of the other parts of our federal revenue 
system. Moreover, it would be an elastic tax, which 
could be easily and quickly increased in cases of emer- 
gency. Such a feature is sadly lacking in the present 
inelastic taxes upon which the national government now 
depends. 

The worst features of existing methods of state taxa- 
tion are found in the operation of the general property 
state taxa- ^^^> which is productive of the worst enor- 
**<*"• mities and demands immediate reform. Ex- 

perience has shown conclusively that personal property 
cannot be reached by this means, and that gross under- 
valuation of real estate cannot be prevented so long as a 
state tax is apportioned among the towns and counties 
upon the basis of the valuations made by the local assess- 
ors. The only method of remedying these evils is to 
abandon the futile attempt to tax personal property in 
this way, and to leave the taxation of real estate exclu- 
sively to the local political units.^ Personal property can 

1 So far as the tax on real estate is concerned, it is conceivable that 
the existing difficulties of undervaluation could be remedied by creating 
etate boards of assessors. But this is probably a political impossibility. 



TAXATION IN THE UNITED STATES. 585 

be reached much more satisfactorily by other methods, 
and the states can secure sufficient revenues without 
the tax on real estate. Corporation, inheritance, and 
license taxes have already become important branches 
of state income ; and much larger receipts can be secured 
from these sources. Pennsylvania some years ago ceased 
to tax real estate, and gave this resource up to the local 
authorities. Its revenues are now derived from corpora- 
tion, inheritance, and license taxes, together with a tax 
on some forms of personal property.^ New York, Massa- 
chusetts, and some other states are now securing more 
income from taxes on corporations, inheritances, and 
licenses than from the state tax on property ; and there 
is a growing tendency in many places to draw an in- 
creasing amount of revenue from the three taxes just 
mentioned.^ It will be seen that personal property is 
reached in a considerable measure by inheritance and 
corporation taxes. Such other forms of personalty as 

1 For the year 1902 the income of the state was derived from the fol- 
lowing principal sources: corporation tax, $10,364,000; inheritance tax, 
§1,231,000; license taxes, $2,646,000 ; tax on personal property, $3,530,000. 

2 In 1905 New York received $20,765,000 from corporation, inheritance, 
and license taxes ; and $1,151,000 from the tax on property. In 1904 
Massachusetts derived $4,676,000 from the first three taxes, and $2,500,000 
from that on property. In fourteen other states the census of 1890 sliowed 
that the receipts from corporation and license taxes varied from thirty- 
three to seventy-five per cent of the total receipts from all taxes separately 
reported. The inclusion of inheritance taxes would raise the percentages 
in some cases. Vermont illustrates especially well the productivity of 
corporation taxes in a state where there are located but few large corpor- 
ate industries. The state now levies a tax on property only in alternate 
years. In 1892 and 1893 corporation taxes yielded $643,476. During 
this period only $272,858 was raised by a state tax on property, which 
was levied only in 1892, See Wood, Taxation in Vermont. 



586 PRINCIPLES OF ECONOMICS. 

household effects, stock in trade, machinery, live stock, 
and farm implements can be readily found by assessors, 
and may be made the objects of a special tax.^ This 
resource could be used by the states, if it should be 
needed after the taxation of real estate had been aban- 
doned ; it could be employed by the local governments ; 
or its proceeds might be divided between state and local 
authorities. The only important forms of personal 
property that would not be reached by such a scheme of 
taxation as is above outlined would be mortgages, 
promissory notes, and book credits. Mortgages can be 
found if rigorous methods of registration are required ; 
but the last two of these items are almost certain to 
escape the assessor, and no attempt should be made to 
reach them. Under present conditions, which permit 
mortgages to escape taxation in many states, it is cer- 
tain that a tax on mortgages is surely shifted onto the 
borrower ; and is not a burden upon the lender. The 
exemption of mortgages from taxation would surely 
result in a lower rate of interest on such loans, and 
would work no injustice. 

Our various local governments should derive much 
more revenue than is secured at present from public 

Local taxa- franchises and all other public privileges. 

tion. There are many indications that this will be 

done in the near future, because the pressure of taxation 
has forced upon the attention of property owners the fact 

1 For household effects it has often been proposed to assume that these 
are equivalent to two or three times the rental value of the premises, and 
to assess them upon this basis. This lessens the inquisitorial features of 
the tax. 



LITERATURE, 587 

that valuable franchises are now given away without 
adequate compensation. The receipts from such sources 
would supply a considerable portion of the revenues re- 
quired by our cities. License taxes are also available 
for local purposes, especially those upon the sale of 
liquors, from which large receipts already accrue. Other 
license taxes should be employed with moderation. 
What other revenues might be needed could easily be 
provided by the exclusive right to tax real estate. In 
1890 our state and local governments raised $443,096,000 
by the taxation of real and personal property. Real 
property made up 74.4 per cent of the total assessed 
valuation, and furnished consequently 1329,500,000 of 
the entire receipts from this tax. It is evident, there- 
fore, that real estate can supply all the revenue needed 
for local purposes after other resources have been prop- 
erly utilized. Moreover, local assessors would be under 
no external compulsion to undervalue taxable property, 
and this tax could be assessed much more equitably 
than at present. 



LITEEATUEE ON CHAPTEE XVIII. 

General Economic Treatises : Andrews, Institutes of Eco- 
nomics, 218-222; Ely, Outlines of Economics, 316-372: Hadley, 
Economics, 447-484 ; Mill, Principles of Political Economy, Bk. 
V. Chaps. 2-7 ; Ricardo, Principles of Political Economy, Chaps. 
8-18; Smith, Wealth of Nations, Bk. V.; Walker, Political 
Economy, 475-505. 

Treatises on Public Finance : Adams, The Science of Fi- 
nance; Bastable, Public Finance; Cohn. The Science of Finance-, 



588 PRINCIPLES OF ECONOMICS. 

CossA, Taxation ; Daniels, Elements of Public Finance ; Plehn, 
Introduction to Public Finance. 

Special Treatises : Adams, Public Debts ; Cooley, Treatise 
on the Law of Taxation; McCulloch, Treatise on Taxation; 
Ross, Sinking Funds; Rosewater, Special Assessments; Selig- 
MAN, Essays in Taxation; Seligman, Progressive Taxation; 
Seligman, The Shifting and Incidence of Taxation; Walker, 
Double Taxation ; Wells, Principles of Taxation ; West, The 
Inheritance Tax. See also the following articles in Lalor's 
Cyclopaedia of Political Science: " Budget *' ; " Customs " ; 
« Debts " ; " Excise " ; " Finance " ; " Revenue, Public " ; " Tar- 
iffs " ; " Taxation" ; " Treasury Department." 

Works Relating Primarily to American Financial History : 
Adams, Taxation in the United States, 1789-1816 ; Bolles, Fi- 
nancial History of the United States ; Bryce, The American 
Commonwealth, Vol. I. Part II. Chap. 43; Durand, The Finances 
of New York City ; Ely, Taxation in American States and Cities 5 
Hollander, The Financial History of Baltimore; Howe, Tax- 
ation in the United States under the Internal Revenue System; 
Kearney, Sketch of American Finances, 1789-1835 ; Plehn, 
The General Property Tax in California ; Scott, The Repudiation 
of State Debts; Taussig, Tariff History of the United States; 
Urdahl, The Fee System in the United States ; Wood, History 
of Taxation in Yermont ; Worthington, Historical Sketch of 
the Finances of Pennsylvania. See also the article "Finance, 
American," in Lalor's Cyclopaedia of Political Science. 

References to Financial Statistics : Statistical Abstract of 
the United States; Eleventh Census, Report on Wealth, Debt, 
and Taxation ; Annual Reports of the Secretary of the Treasury; 
Seligman, Finance Statistics of American Commonwealths. 



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590 PRINCIPLES OF ECONOMICS, 

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592 PRINCIPLES OF ECONOMICS. 

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Reports of the Chicago Board of Trade. (Chicago.) 
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R6sumd of Fremont's Expedition. Century Magazine, XLI. 

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Ricardo, D, The works of Ricardo. Edited by J. R. McCuUoch. 

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Roberts, E. H. Government Revenue. (Boston, 1884.) 
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Rogers, J. E. T. Six Centuries of Work and Wages. (New York, 

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Roosevelt, T. T^fe of Thomas H. Benton. (Boston and New 

York, 1887.> 



600 PRINCIPLES OF ECONOMICS, 

Roosevelt, T. The Winning of the West. (New York, 1889 

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Salmon, D. E. Report on the History and Present Condition of 
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Sato, S. History of the Land Question in the United States. 
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Schafile, A. The Quintessence of Socialism. Third edition. 
(London, 1891.) 

Schloss, D. F. Methods of Industrial Remuneration. Third 
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Schonhof, J. The Economy of High Wages. (New York, 1893.) 

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Schouler, J. History of the United States of America. (Wash- 
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Schwab, J. C. History of the New York Property Tax. Publi. 
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Scott, W. A. The Repudiation of State Debts. (New York, 
1893.) 

Scribner's Statistical Atlas of the United States. (New York, 
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Scrivenor, H. Comprehensive History of the Iron Trade 
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BIBLIOGRAPHY. 601 

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New York, 1891.) ' 
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602 PRINCIPLES OF ECONOMICS. 

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Mbliography. 603 

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1 This German work is included here since it is the only work of the 
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604 PRINCIPLES OF ECONOMICS. 

Willoughby, VT. W. The iS^ature of the State. (New York and 
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. Government and Administration in the United States. 

Johns Hopkins University Studies. (Baltimore, 1891.) 

Wilson, W. The State. (Boston, 1889.) 

— — . Division and Reunion. (New York and London, 1893.) 

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(Boston and New York, 1889.) 

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York, 1893.) 

Woolsey, T. D. Communism and Socialism. (New York, 1880.) 

Worthington. T. K. Historical Sketch of the Finances of Penn- 
sylvania. Publications of American Economic Association. 
(Baltimore, 1887.) 

"Wright, C. D. Report on Industrial Conciliation and Arbitration. 
(Boston, 1881.) 

. The Industrial Evolution of the United States. (Chautau- 
qua Press, 1895.) 

Wynne, J. H. General History of the British Empire in America. 
(London, 1770.) 

Young, E. Special Report on the Customs Tariff Legislation of 
the United States. (Washington, 1877.) 

II. PERIODICAL LITERATURE. 

The following economic periodicals and series of mono- 
graphs are important for the student: — 

Annals of the American Academy of Political and Social 

Science. (Philadelphia, 1890 .) 

Economic Journal. (London, 1891 .) 

Journal of Political Economy. (Chicago, 1892 .) 

Political Science Quarterly. (New York, 1886 .) 

Publications of the American Economic Association. (Balti- 
more or New York, 1886 .) 

Publications of the American Statistical Association. (Bos* 
ton, 1889 .) 



BIBLIOGRAPHY. 605 

Quarterly Journal of Economics. (Boston, 1887 .) 

The following commercial and financial papers or journals 
are also of great value : — 

Banker's Magazine and Statistical Register. (New York, 

1846 .) 

Bradstreets, A Journal of Trade, Finance, and Public Economy. 

(New York.) 
Commercial and Financial Chronicle. (New York.) 

Economist. (London, 1843 .) 

New York Journal of Commerce and Commercial Bulletin. 

(New York.) 

III. FRENCH AND GERMAN WORKS. 

Eor the guidance of readers who may desire to commence 
the study of French and German works on economics, the 
following references are suggested: — 

I. French Works on Economics. 

Say, J. B. Traite d']^conomie Politique. Eighth edition. (Paris, 
1876.) This work was translated and published in this country 
early in the century. For many years it was widely used and 
had great influence. The American translation is referred to 
above. 

Cherbuliez, A. E. Precis de la Science ifeconomique. (Paris, 
1862.) One of the best presentations of French economic 
thought of the middle of the century. 

Chevalier, M. Cours d'ficonomie Politique. Second edition. 
(Paris, 1855.) La Monnaie. (Paris, 1866.) Chevalier favored 
monometallism. One of his works has been translated under 
the title, " The Probable Fall in the Value of Gold." (New 
York, 1859.) 

Wolowski, L. De la Monnaie. (Paris, 1868.) L'Or et L' Argent. 
(Paris, 1870.) Wolowski was an able bimetallist. 

Leroy-Beaulieu, P. Traite de la Science des Finances. Fifth 
edition. (Paris, 1892.) The most valuable French treatise on 



606 PRINCIPLES OF ECONOMICS. 

public finance, and one of the best in any lunguage. Traits 

d'Economie Politique. (Paris, 1896.) This is one of the most 

important recent works on economics. 
Gide, Ch. Principes d'ficonomie Politique. Third edition. 

(Paris, 1891.) The American translation of this work has 

been referred to constantly in this book. 
Block, M. Les Progrfes de la Science Economique depuis Ad. 

Smith. (Paris, 1890.) An interesting book, the result of 

■wide reading, but sometimes one-sided in its judgments. 
Say, L. (Editor.) Xouveau Dictionnaire d'Economie Politique. 

(Paris, 1891-1892.) A valuable work for reference. 

II. German Works on Economics. 

Rau, K. H. Lehrbuch der Politischen Oekonomie. Eighth edi- 
tion. (Leipzig, 1868.) The earliest edition of this work 
appeared in 1826, and it served as the leading text-book in 
Germany for forty years. Rau was, in a general way, a fol- 
lower of Adam Smith ; but he presents in systematic form the 
results of contemporary investigations. 
Hildebrand, B. Die Nation alokonomie der Gegenwart und 
Zukunft. (Frankfurt, 1848.) An effective and readable state- 
ment of some of the views of the German historical economists. 
Knies, K. Die Politische Oekonomie vom Standpunkte der ges- 
chichtlichen Methode. Second edition. (Brunswick, 1883.) 
This book is the best presentation of the views of the historical 
school, but the style is cumbersome and difficult. 
Hoscher, W. System der Volkswirthschaft. 

I. Grudlagen. Twentieth edition. (Stuttgart, 1892,) For 
the American translation, see above. 
IIIo Nationalokonomik des Handels und Gewerbfleisses. 

. Sixth edition. (Stuttgart, 1890.) 
IV. Finanzwissenschaft. Third edition. (Stuttgart, 1889.) 
All those works are mines of information, but not so im- 
portant from the point of view of economic theory. 
SchmoUer, G. Ueber Einige Grundfragen des Eechts und der 
Volkswirthschaft. (Jena, 1875.) SchmoUer is the present 
leader of the German historical economists. A portion of one 
of his works is translated in Ashley's " Mercantile System." 



BIBLIOGRAPHY 607 

See also SchmoUers article on *' Volkswirthschaft, Volkswirth- 
schaftslehre und methode/* in Conrad's Handwoyterbuch. 

Cohn, G. System der Nationalokonomie. 

1. Grundlegung. (Stuttgart, 1885.) One chapter of this 
volume has been translated under the title, " History of 
Political Economy." See above. 
U. Finanzwissenschaft. (Stuttgart, 1889.) Of this volume 
all the chapters but one have been translated. See 
above. 
Both of these works are readable and suggestive rather 
than very profound. 

Wagner, A. Grundlegung der Politischen Oekonomie. Third 
edition. (Leipzig, 1892.) This book gives a comprehensive 
survey of the fundamental concepts and facts of economics 
from a juridical point of view, and should be read by every 
thorough student. It forms the first volume of a great *' Lehr- 
uud Handbuch der Politischen Oekonomie," to which Wagner 
has contributed several important volumes on public finance. 

Menger, C Grundsatze der Volkswirthschaftslehre. (Vienna, 
1871.) This is a rare but extremely valuable treatise. Menger 
is in some respects the leader of the Austrian school of econo- 
mists. He has a notable article entitled " Geld " in Conrad's 
Handworterbuch. Important works by Bohm-Bawerk and 
Wieser, two of Menger's pupils, have been translated. See 
above. 

Eisenhart, H. Geschichte der Nationalokonomik. Second edi- 
tion. (Jena, 1891.) A brief history of economics. 

Schonberg, G. (Editor.) Handbuch der Politischen Oekonomie. 
Third edition. (Tubingen, 1890-1891.) An invaluable collection 
of monographs by eminent economists, covering quite com- 
pletely the field of economic science, and presenting the latest 
results, especially of German investigations. 

Conrad, J. (Editor.) Handworterbuch der Staatswissenschaften. 
(Jena, 1890-1895.) An indispensable work of reference upon 
almost all subjects, and much more valuable than any of the 
French or English dictionaries of political economy. 



INDEX. 



THE REFERENCES ARE TO PAGE NUMBERS. 



Act of March 14, 1900, 302. 

Act of 1873, relating to coinage, 
298; false charges concerning, 
298. 

Agriculture, history of, in Amer- 
ica, 35-43; extensive cultiva- 
tion a feature of American 
agriculture, 42; land tenures 
and American agriculture, 
41. 

American Federation of Labor, 
477. 

Anarchism and anarchists, 503, 
519. 

Andrews, E. B., on illustration of 
the clearing system, 273; on 
pure profits, 464-465. 

Arbitration, voluntary, 491-492; 
compulsory, 492-493. 

Atkinson, E., on cotton industry, 
70; on wastes in consumption 
of food, and wastes by fire, 
106-107. 

Banks, and the check system, 
271-273; bank notes, 278; 
the deposit function, 279; the 
discount function, 279-280; 
illustration of banking func- 
tions, 280-283 ; the issue func- 
tion, 283-284; state banks in 



the U. S., 296; the national 
banking system, 296-298. 

Banks, savings, important in 
process of capital formation, 
139; statistics of, in U. S., 139. 

Barter, disadvantages of, 224. 

Bills of exchange and drafts, 274. 

Bimetallism, national, 303; and 
monometallism, 303-304; in- 
ternational bimetallism, 304- 
313; desirability of, 305-309 
practicability of, 309-313; the 
experience of France, 310-311 
political obstacles to, 313. 

Birth and death rates, 124-125 
birth rate in the U. S., 130. 

Blacklist, 481. 

Bland-Allison Act, 298-299. 

Bohm-Bawerk, on limitations to 
the demand for land, 496. 

Bonds, government, 539-540. 

Boycotts, 481. 

Bullion and Money, 237-238. 

Canals, projected by Washing- 
ton, 60-61 ; the Erie Canal, 61 ; 
other canals, 61; relations to 
railways, 61. 

Capital, social, as a factor of pro- 
duction, 131-141; definition 
of, 132; relation to indirect 



§9 



610 



INDEX. 



production, 132; concrete 
forms of, 133-134; land and 
acquired faculties are not cap- 
ital, 135 ; subsistence not capi- 
tal, 136; fixed and circulating 
capital, 137; free and special- 
ized, 137-138; formation of, 
138-139; abstinence necessary 
for capital formation, 140; in- 
ducements to saving, 140; 
maintenance or increase of, 
141 ; an element in cost of pro- 
duction, 169-170, 206; im- 
portance of, in determination 
of social income, 413-414; 
private or acquisitive, 423-424 ; 
the value of productive capital, 
424. 

Cattle raising, as a frontier indus- 
try, 34 ; in the colonies, 35 ; in 
later times, 35; stock raising 
as a part of American agricul- 
ture, 40-41. 

Cereals, production of, 35-37; 
important exports, 36. 

Clearing house system, 272- 
273. 

Coal, production of, in U. S., 
44-55; concentration of iron 
production in vicinity of coal 
supplies, 74. 

Coins and coinage, defined, 229; 
history of, 228-229; free and 
gratuitous coinage, 229 ; brass- 
age, 230; seignorage, 230; 
origin of, 230-231. 

Competition, defined, 191-192; 
tends to equalize price of goods 
that represent the same cost of 
production, 191; commercial 
and industrial competition, 
203; is often imperfect, 213. 

Comptroller of the Currency, 296. 

Conciliation, 490-491. 



Constitutionality of labor legisla- 
tion, 474-475. 

Consumption of Wealth, defini- 
tion of, 87 ; consumption and 
production, 88 ; laws of, 88-99 ; 
economic order of, 91-95; pro- 
ductive and final consumption, 
98; statistics of consumption, 
99-101; economy in consump- 
tion, 101-109; the law of de- 
mand, 110-113. 

Cooperation, or co5perative pro- 
duction, defined, 159; results 
of, 487-489. 

Corporations, few in number in 
England in 1776, 54; nature 
of, 155-159; advantages of, 
156-158; limited liability of 
shareholders, 157-158; weak- 
ness of, 158-159. 

Cost of production, social cost, 
168; elements of, 168-170; 
social and employer's cost, 
204; elements of employer's 
cost, 205-209; different costs 
of production, 209-215. 

Cotton, production of, in U. S., 
38-39; importance of cotton 
as article of export, 39. 

Cotton industry, developed rap- 
idly after 1807, 69; largely 
concentrated in New Eng- 
land, 69; rapid growth in 
South, 69-70; character of, 
70-71. 

Credit, definition of, 270; book 
credits, 270-271 ; promissory 
notes, 271; checks, 271-273; 
bills of exchange, 273-274; 
foreign exchanges, 274-278; 
banks as institutions of credit, 
279-284; advantages and dis- 
advantages of credit, 284-285; 
influence of credit upon prices. 



INDEX. 



611 



289-291; credit limited by 

volume of money, 292, 
Cumberland Road, 60. 
Custom, and competition, 192; 

obscures normal value, 215. 
Customs taxes, 550-554; see 

''Tariff." 

Demand, the law of, 110-113; a 
factor in determining market 
value, 193-194 ; equalization 
of international demand, 386- 
387. 

Discriminating railway rates, 
359-360. 

Distribution of wealth, 411-467; 
the process of primary distribu- 
tion, 416-417; secondary dis- 
tribution, 417-420; profits, 
wages, interest, and rent, 421; 
the law* of interest, 423-435; 
the law of rent, 435-446; the 
law of wages, 446-460; the 
law of profits, 460-467; justi- 
fication of the present distribu- 
tion of wealth, 512. 

Division of occupations, 149; of 
labor, 150-151. 

Dollar, contents of gold, 250; of 
silver, 250; history of, in U. S., 
294-295; coinage of silver 
dollar stopped, 298; limited 
silver coinage renewed, 298- 
299. 

Domains, revenue from, 534- 
535. 

Duties, see "Taxes." 

Economics, definition of, 79. 

Ely, R. T., on definition of pro- 
duction, 115; on definition of 
checks, 271; on limits to the 
demand for land, 496 ; on defi- 
nition of socialism, 500. 



Eminent domain, 162. 

Employer, position of, in distribu- 
tion, 418-420. 

Engel's Law, 99-100. 

English manufactures and com- 
merce, condition of, in 1760, 
53-54; changed by Industrial 
Revolution, 55-57. 

Entrepreneur, see "Undertaker." 

Escheats, a source of public rev- 
enue, 538. 

Exchange of products, a form of 
associated activity, 152-153; 
development of, 186-187; ad- 
vantages of, 187-188 ; mechan- 
ism of, 188-189; value, 189- 
222; foreign exchanges, 373- 
409 ; primary distribution, 
416-417. 

Excise, see "Taxes." 

Exports of the U. S., 373-374. 

Factors of production, 118-141; 
organization of, 149-163; co- 
operation of, 153. 

Factory Acts, 473-474. 

Fees, 537-538. 

Fines and penalties, a source of 
public revenue, 538. 

Fisheries, early importance of, 
43; development of shore and 
inland fisheries, 43-44; U. S. 
Fish Commission, 44. 

Flax and hemp, production of, in 
U. S., 38. 

Foreign exchanges, method of 
settling, 274-275; the rate of 
exchange, 276-277; of the 
U. S., 373-374; nature of in- 
ternational exchanges, 375- 
380; comparative positions of 
England and the U. S., 377; 
international movements of 
money, 378-380 ; advantages 



612 



INDEX. 



of foreign trade, 380; inter- 
national values, 380-387; im- 
mobility of labor and capital, 
380-381 ; international trade 
based upon differences in rela- 
tive prices, 382-386; restric- 
tion of foreign exchanges, 
387-409. 

Foreign trade of the U. S., 373- 
374. 

Freedom in establishment of pro- 
ductive undertakings, 166- 
168. 

Freight charges and the foreign 
exchanges, 376-377; burden 
of, 387. 

Functions of money, (1) medium 
of exchange, 246 ; (2) value de- 
nominator, 247; (3) standard 
of deferred payments, 247; 
(4) legal tender, 248. 

Fur trade, in the colonies, 33; 
later history of, 34; economic 
importance of, 33. 

George, Henry, proposals for 
land nationalization, 494-500. 

Gifts, a source of public revenue, 
538. 

Gold and silver, production of, in 
U. S. prior to 1848, 44; since 
1849, 45 ; have displaced other 
metals as money, 226-228; 
world's stock of gold money 
and bars, 227; conditions of 
production of gold and silver, 
233-234; history of produc- 
tion of gold and silver, 244- 
246 ; territorial distribution of, 
285-288 ; fall in value of silver, 
298-299, 303-304; gold and 
silver certificates, 299-300; in- 
crease of gold production in 
recent years, 307-309. 



Goods, free and economic, 85; 
economic goods usually ex- 
changeable, 86; durable and 
perishable, 87; present and 
future goods, 97. 

Governments, did not originate 
money, 231; but have regu- 
lated coinage, 231-232; and 
have passed legal-tender laws, 
232; economic functions per- 
formed by, 514-516; old views 
of governmental functions, 
516-517; modern thought, 
517-518; modern theories of 
governmental functions, 518- 
524; consideration of the sev- 
eral functions of government, 
524-528. 

Government paper money, 263- 
269. 

Granger laws, 362. 

Grass and hay crop, importance 
of, in U. S., 37. 

Greenbacks, or U. S, notes, 269; 
issued in 1862, 295; history of, 
295-296. 

Gresham's Law, 251-253. 

Guilds, in England in eighteenth 
century, 54, 

Hadley, a. T., on effect of large 
fixed capitals in disturbing 
prices, 219; on wages, 449; on 
purpose of labor unions, 484. 

Hamilton, Alexander, on Ameri- 
can manufactures, 51-52. 

Hewitt, A. S., on iron industry of 
the U. S., 75; on the obliga- 
tions of great riches, 104. 

Housekeeping, importance of, 
105; wastes in, 105-106. 

Immigration, statistics of , 19-20;. 
character of, 20. 



INDEX. 



613 



Import trade of the U. S., 374. 

Income, social, 411-414. 

Incomes, private, 414-416; clas- 
sification of, 416-417. 

Indented servitude, 22-23. 

Index numbers, 234. 

Individualism, 520-524. 

Industrial Revolution in Eng- 
land, caused by inventions, 
55-56; marked by growth of 
factory system, 56; intensified 
competition, 57. 

Industrial Revolution in the 
U. S., 57-58. 

Interest, defined, 421; social and 
private capital, 423-424 ; value 
of productive capital, 424; 
short and long time loans, 
424-425; rate of interest, 426- 
431 ; interest arises from differ- 
ence in value of present and 
future goods, 426-427; risk 
and interest, 430-431; ten- 
dency of rate to decline, 431; 
rates for long and short loans, 
432; the general loan market, 
433; the rate of interest and 
the supply of money, 433-434 ; 
justification of interest, 434; 
usury laws, 434-435. 

International banking houses, 
379. 

International payments, 375- 
376; various forms of indebt- 
edness, 376-377; indirect pay- 
ments, 377-378 ; movements 
of money, 378-380. 

Interstate Commerce Law, 364. 

Investment of labor and capital 
upon land, and law of diminish- 
ing returns in agriculture, 170- 
173; implications of the law, 
173; in manufactures and 
other industries, 174-176. 



Iron, production of, in U. S., 
44-46; iron and steel indus- 
tries, 74-76; growth of pro- 
duction, 75-76; manufactures 
and exports of, 76. 

Jefferson, Thomas, on slavery, 

25. 
Jevons, W. S., on iron trade in 

U. S., 75; on definition of coins, 

229. 

Knights of Labor, 476-477. 

Labor, scarcity of labor force in 
colonies, 22; systems of, in 
U. S., 22 et seq.; definition of, 
121; different kinds of, 121- 
122; economic importance 
of, 123; efficiency of, 123- 
124; the supply of, 124-131; 
an element in cost of produc- 
tion, 170, 205; a commodity, 
468 ; peculiarities of, as a com- 
modity, 469-472; relation of, 
to product, 485-489. 

Labor contract, nature of, 468- 
472; restriction of, by legisla- 
tion, 473-475; and labor or- 
ganizations, 476-485; indus- 
trial warfare, 489-493. 

Labor organizations, two types 
of, 476; objects of, 477-478; 
desire collective bargaining, 
478; strikes and boycotts, 
479-481; have modified the 
labor contract, 481-482; vari- 
ous criticisms of, 483-485. 

Laissez faire, 518. 

Land nationalization, 494-500 ; 
Land Tenure Reform Associa- 
tion, 494; proposals of Henry 
George, 494-495 ; Mr. George's 
arguments, 495-498 ; general 
considerations, 498-500. 



614 



INt)EX. 



Land tenures, in Europe, 14; in 
the U. S., 14-15. 

Large-scale production, 176-177; 
secures economy of capital, 
178-180; encourages experi- 
mentation, 180; secures econ- 
omy of labor, 180-181; also 
economy in subsidiary pro- 
cesses, 181; yet certain ad- 
vantages attend production on 
smaller scale, 181-183; large- 
scale production not necessa- 
rily monopoly, 183 ; in different 
branches of business, 183- 
184. 

Lassalle, Ferdinand, on absti- 
nence, 140. 

Laveleye, on advantages of ex- 
change, 188. 

Law of diminishing returns, see 
''Investment of labor upon 
land." 

Legal tender, 232, 248. 

Leroy-Beaulieu, P., on economy, 
102; on saving and spending, 
108. 

Loans, public, 539; their forms, 
539-540; their objects, 540- 
541; their effects, 541. 

Loans, short and long time, 424- 
425 ; supply and demand, 427- 
430; rates for short and long 
time loans, 432. 

Localization of industry, 142- 
148; influenced by markets, 
142, by natural conditions, 143, 
by water ways, 144, by labor 
supply, 145, by special influ- 
ences, 146; advantages of es- 
tablished centres, 146-147 ; 
limitation of such advantages, 
148. 

Lockout, 481. 

Lotteries, public, 538. 



Lowell, F., constructs fully 
equipped factory, 58. 

Lowell, J. R., on Dred Scott de- 
cision, 578. 

Luxury, 102-105; does not 
''make trade good," 108-109. 

"Magic fund" delusion, 549- 
550. 

Manufactures, colonial, 48-52 ; 
England's attitude, 50, 57; do- 
mestic industries, 48; produc- 
tion for markets, 49; high 
wages an obstacle to, 51; con- 
dition of, in 1791, 51-52. 

Market, defined, 190-191. 

Market value, 192-200. 

Marshall, A., upon law of dimin- 
ishing returns, 173 ; upon value, 
212; upon trade morality, 221. 

Marx, K., evolutionary socialist, 
504. 

Military expenditures, 531. 

Mill, J. S., on relation of money 
to prices, 235; on influence of 
credit upon prices, 289-290; 
on value of patent rights, 464; 
on individualism, 521. 

Mining industries of U. S., 44-46. 

Money, purchasers measure sac- 
rifices in terms of, 110-111; 
marginal utility of, 111; de- 
velopment of metallic money, 
224-233 ; primitive money, 
224-226; precious metals dis- 
placed other forms of money, 
226-228; coinage, 228-231; 
governments and money, 231- 
232; value of metalHc money, 
233-244 ; supply of money and 
demand for money, 238-241; 
value of money and marginal 
cost of production, 241-244; 
functions of money, 246-248; 



INDEX. 



615 



debased money, 248-258; in- 
flation and contraction, 258- 
263; changes in volume of 
money, 260-261; appreciation 
and interest, 261; government 
paper, 263-269 ; goverimient 
issues in the U. S., 264; argu- 
ments for and against govern- 
ment paper, 264-268; conver- 
tible government paper, 267- 
270; territorial distribution 
of, 285-288 ; representative 
money, 289; credit and prices, 
289-293; money problem in 
the U. S., 301-302. 

Monometallism, 303-305. 

Monopohes, fiscal, 311-312, 536. 

Monopoly, is power to control 
supply, 222, 315; monopoly 
value, 315-318; legal monopo- 
lies, 319-320; natural monopo- 
lies, 320-322; capitalistic mo- 
nopolies, 322-324; extent of 
monopoly influence, 324 ; com- 
plexity of monopolies, 325; 
absolute monopoly seldom pos- 
sible, 326; problem of natural 
monopolies, 326-330 ; growth 
of capitalistic monopolies, 331- 
334 ; criminal methods of some 
monopolies, 334-335 ; final con- 
siderations, 335-340. 

National banking system, 296- 
298. 

Nature, a factor of production, 
118-121; contributions of, 
118-119; appropriability of 
natural contributions, 119- 
120; man and nature, 120- 
121. 

Non-competing groups among 
laborers, 457. 

Normal value, 200-215. 



Occupations, statistics of, 122. 

Partnership, 155. 

Pensions, expenditures for, 532. 

Personal services, are economic 
goods, 84-86; production of, 
117-118. 

Piece wages, 485. 

Pools, 322-323, 346-348. 

Population, see ' ' Supply of labor. " 

Population of the U. S., statistics 
of, 18; mixed character of, 18, 
20; natural increase of, 19; 
mobility of, 20-21; concen- 
tration of, 21-22. 

Precious metals, see ''Gold and 
silver." 

Price, defined, 190; changes in 
general prices, 233-234; gen- 
eral and individual prices, 246; 
credit and prices, 289-293 ; re- 
cent fall of, 305. 

Production of wealth, defined, 
115; productivity of various 
industries, 116; production 
and sacrifice, 116-117; of per- 
sonal services, 117-118; a so- 
cial process, 149; stages in 
development of, 163-166; free- 
dom of, 166-168; large scale 
production, 176-184. 

Profits, defined, 421; profits and 
risks of investment, 460-461; 
necessary profits, 461-463; dif- 
ferential profits, 463-465; mo- 
nopoly profits, 465-467; capi- 
talization of, 466-467. 

Profit sharing, 486-487. 

Progressive wages, 485-486. 

Public expenditures, 529-534 ; 
their classification, 529 ; in the 
United States, 530-532; the 
growth of public expenditures, 
533-534. 



616 



INDEX. 



Public industries, revenue from, 
535-537. 

Public lands, management of, 
15; public domain of U. S., 
15-17; policy of U. S., 17. 

Public revenues, 534-550; from 
domains, 534-535; from pub- 
lic industries, 535-537; from 
fees, 537-538; from miscella- 
neous sources, 538; from spe- 
cial assessments, 538-539 ; from 
loans, 539-541; from taxes, 
541-550. 

Railroads, construction of, in 
U. S., 61-63; subsidies to, 63; 
over-construction of, 63 ; trunk 
lines, 64; competition and 
combination, 64-65; character 
of early roads, 343; trunk 
lines, 344; railroad systems, 
344-345 ; competition, 345 ; 
pools, 346-348; later consoli- 
dation, 348-350; reasons for 
consolidation, 351-353; rail- 
road rates, 353-361; early 
policy toward railroads, 361- 
362; public character of rail- 
roads, 362-363; state railroad 
commissions, 363-364; Inter- 
state Commerce Law*, 364-369 ; 
national ownership, 370-372. 

Rent, defined, 421, 435; value of 
natural agents, 436; income 
from natural agents, the rent 
of land, 437-446; rent not a 
cause of high prices, 442-444; 
actual rents and economic rent, 
444; alleged tendency of rent 

' to increase, 445-446; the un- 
earned increment, 446, 495. 

Rights of contract, determined 
and enforced by the State, 161- 
163. 



Rights of inheritance and be- 
quest, 161. 

Rights of property, defined, 160; 
not natural rights, 161; always 
limited by law, 161-162. 

Risks, not an independent ele- 
ment in cost, 207, 209; and 
the rate of interest, 430- 
431. 

Roads, in the colonies, 58-59; 
built by local governments in 
U. S., 59; bad roads of U. S., 
59. 

Saving and investment, 107-109 ; 
two forms of saving, 107-108; 
saving does not injure trade, 
108-109 ; desirability of, 109. 

Seligman, E. R. A., on definition 
of fees, 537; on definition of 
special assessments, 538; on 
the property tax, 563, 569. 

Sherman Act, 300-301. 

Shipbuilding, early growth of, 
65-66; remarkable history of 
our marine, until 1860, 66-67; 
decline of merchant marine, 
67-68 ; iron and steel construc- 
tion, 68; illiberal navigation 
laws, 66-67. 

Sidgwick, H., on power of mo- 
nopolists, 316. 

Silk industry, 73. 

Silver, see ''Gold and silver." 

Slater, S., erects cotton mill in 
1790, 58. 

Slavery in the U. S., origin of, 24; 
the slave trade, 24 ; geographi- 
cal distribution of, 24-25; un- 
profitable in the North, 25; 
profitable in the South, 25 ; 
its effect upon the South, 26. 

Smith, A., on corporations, 54; 
on division of labor, 150; on 



INDEX. 



617 



corporations, 158; on protec- 
tive tariffs, 409; on causes of 
differences in wages, 456; on 
private enterprise, 517, 

Socialism, defined, 500; cardinal 
elements of, 501-502; ambigu- 
ous use of the term, 502; 
revolutionary* and evolution- 
ary socialism, 503-504; an 
old theory, 504; as a scheme 
for production, 505-508; as a 
scheme for distribution, 508- 
510; final considerations, 510- 
512. 

Special assessments, 538-539. 

Specific and ad valorem duties, 
388, 551. 

Stages in development of produc- 
tion, the hunting and fishing 
stage, 163; the pastoral stage, 
164; the agricultural stage, 
164-165; manufacturing and 
commercial stage, 165; indus- 
trial stage, 166. 

Stages of westward expansion, 
11-13. 

Standard of living, defined, 126; 
affects growth of population, 
127-129; may be raised or 
lowered, 127; relation of eco- 
nomic progress to, 129 ; in the 
U. S., 130; sets limits to the 
fall of wages, 453; may be 
constantly raised, 455. 

Standard Oil Company, 323, 324, 
325, 336, 339, 340. 

State participates in process of 
production, 160-163. 

Stimson, F. J., on the legality of 
strikes, 480; on collective bar- 
gaining, 482. 

Strikes, 479, 484. 

Sugar cane, cultivation of, in U. S., 
39-40. 



Supply, defined, 194 ; a factor in 
determining market value, 
194-195; of labor, 471. 

Supply of labor, in relation to 
birth and death rates, 124-125; 
in relation to the standard to 
living, 126-130. 

Tabular standard of value, 261. 

Tariff on imports, 387-388; rev- 
enue tariffs, 388-389; protec- 
tive tariffs in the U.S., 389-390 ; 
detailed effects, 391-397; dif- 
ferent costs of production, 397 ; 
what protective tariffs cannot 
accomplish, 397-401; tariffs 
and wages, 400-404 ; the ad visi- 
bility of adopting protective 
tariffs, 404-409; protection to 
infant industries, 405-406; di- 
versity of industries, 406-408; 
our tariff an historical product, 
408-409. 

Taxes, on monopoly earnings, 
318, 568; taxes defined, 541- 
542 ; their position among 
public revenues, 542-543 ; their 
justification, 543-544; justice 
in taxation, 544-546; propor- 
tional, progressive, and regres- 
sive taxes, 546-548 ; direct and 
indirect taxes, 548-549; cus- 
toms taxes, 349-350, 550-552; 
excise taxes, 554-558; taxes 
on transactions, 558-559; poll 
or capitation taxes, 559-560; 
the general property tax, 560- 
569 ; incidence of the property 
tax, 564-568 ; corporation 
taxes, 569-573; license taxes, 
573-574 ; inheritance taxes, 
574-577 ; the income tax, 577- 
582; taxation in the United 
States, 582-587. 



618 



INDEX. 



Textile industries, see "Cotton," 
"Woolen," and "Silk indus- 
tries." 

Time wages, 485. 

Tobacco, cultivation ol, in U. S., 
40. 

Treasury notes, 539. 

Truck payments, 474. 

Trunk lines, 344. 

Trusts, 323. 

Turner, F. J., on the development 
of industries in the U. S., 32. 

Undertaker, definition of term, 
154; functions of, 153-154; 
forms of business undertakings, 
155-160; single entrepreneur 
system, 155; position of , in dis- 
tribution, 418-420, 460-461; 
attempt to dispense with, 488- 
489. 

Unearned increment, 446, 495- 
500. 

Utilities, include material objects 
or personal services, 84; ele- 
mentary, place, form, and time 
utilities, 86; production of, 
115. 

Utility, definition of, 84 ; the law 
of diminishing utility, 88-91; 
total and marginal utility, 
91; importance of a good 
depends upon marginal utility, 
95-96. 

Value, defined, 189-190; the de- 
termination of market value, 
192-200; the equalization of 
supply and demand, 195-197; 
fluctuations in market values, 
197-198; forced sales, 198- 
199; determination of normal 
values, 200-215; analysis of 



cost of production to the em- 
ployer, 204-209; normal val- 
ues are adjusted to the cost of 
production, 201-204; different 
costs of production, 209-211; 
normal value depends upon 
balance of opposing forces, 212 ; 
normal value obscured by vari- 
ous causes, 215-222; monop- 
oly value, 315-318; theory of 
international values, 380-387. 

Wages, free land a cause of high 
wages, 28; evidence of high 
wages in colonial times, 28; 
high wages in the U. S., 400- 
404; defined, 421, 446; real 
and nominal wages, 447 ; wages 
and salaries, 447; time and 
piece wages, 448; labor cost, 
448-449 ; wages the discounted 
product of industry, 449; gen- 
eral and relative wages, 449- 
450; general wages, 450-455; 
limits to the increase of wages, 
451-455; the standard of liv- 
ing, 453-454; relative wages, 
455-460. 

Wages system, nature of, 468; 
freedom of contract, 468; pecu- 
liarities of the commodity, 
labor, 469-472; labor legisla- 
tion, 473-475 ; labor organiza- 
tions, 476-485 ; unfavorable 
relation of laborers to product, 
485-489; concihation and ar- 
bitration, 489-493. 

Walker, F. A., on relation of 
credit to prices, 291; on pro- 
posals of Henry George, 
498. 

Wants, human wants the starting 
point of economicgj 79; origin 



INDEX. 



619 



of, 80-81 ; development of, 81 ; 

culture and existence wants, 

82-83 ; satiability of, 88. 
Waste, in consumption of food, 

105-106; by fire, 106-107. 
Water transportation, 60. 



Wealth, production of, 115; and 
progress, 129; social wealth, 
411. 

Wilson, Woodrow, on westward 
expansion, 13-14. 

Woolen industry, 71-73. 



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